[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
IMPLEMENTATION OF FINCEN'S CUSTOMER
DUE DILIGENCE RULE_
FINANCIAL INSTITUTION PERSPECTIVE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
APRIL 27, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-90
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
31-436 PDF WASHINGTON : 2018
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Shannon McGahn, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
BLAINE LUETKEMEYER, Missouri, Chairman
KEITH J. ROTHFUS, Pennsylvania, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL POSEY, Florida DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina AL GREEN, Texas
ANDY BARR, Kentucky KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas DENNY HECK, Washington
MIA LOVE, Utah GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
C O N T E N T S
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Page
Hearing held on:
April 27, 2018............................................... 1
Appendix:
April 27, 2018............................................... 29
WITNESSES
Friday, April 27, 2018
Baer, Greg, President, The Clearing House Association............ 2
Greene, Carlton, Partner, Crowell & Moring LLP................... 4
Kalman, Gary, Executive Director, The FACT Coalition............. 5
Martinez, Dalia, Executive Vice President, International Bank of
Commerce, on behalf of the Mid-Size Bank Coalition............. 7
APPENDIX
Prepared statements:
Baer, Greg................................................... 30
Greene, Carlton.............................................. 42
Kalman, Gary................................................. 45
Martinez, Dalia.............................................. 56
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Written statement from Independent Community Bankers of
America (ICBA)............................................. 67
Written statement from National Association of Federally-
Insured Credit Unions (NAFCU).............................. 70
Kalman, Gary:
Written responses to questions for the record submitted by
Representative Waters...................................... 72
IMPLEMENTATION OF FINCEN'S CUSTOMER
DUE DILIGENCE RULE--
FINANCIAL INSTITUTION PERSPECTIVE
----------
Friday, April 27, 2018
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Present: Representatives Luetkemeyer, Rothfus, Posey, Ross,
Pittenger, Barr, Tipton, Williams, Love, Loudermilk, Tenney,
Clay, Maloney, Heck, Crist, and Waters.
Also present: Representatives Pearce and Hill.
Chairman Luetkemeyer. The meeting will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time.
This hearing is entitled, ``Implementation of FinCEN's
Customer Due Diligence Rule--Financial Institution
Perspective.''
I would like to thank the witnesses for appearing today. We
appreciate your participation and look forward to your
discussion.
In the interest of time, the Ranking Member and I have
agreed to forego opening statements and move directly to
witness testimony.
Today we welcome the testimony of Mr. Greg Baer, President
of The Clearing House Association; Mr. Carlton Greene, Partner,
Crowell & Moring; Mr. Gary Kalman, Executive Director of the
FACT Coalition; and Ms. Dalia Martinez, Executive Vice
President, International Bank of Commerce, on behalf of the
Mid-Size Bank Coalition of America.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. Without objection, each of
your written statements will be made part of the record.
A little bit on the lighting system. Green means go, yellow
means you have a minute to wrap up, and red means you should be
closing up and moving on.
We do have votes in the 10:30 to 11 o'clock range,
somewhere in there. We hope to be able to get as far down the
road as we can. That is why we have done away with opening
statements.
Depending on how many participants we have in the committee
today, we will continue after votes, if we need to. So
hopefully, we will get a lot done between now and then.
With that, Mr. Baer, you are recognized for 5 minutes.
STATEMENT OF GREG BAER
Mr. Baer. Thank you.
Chairman Luetkemeyer, Ranking Member Maloney, and members
of the subcommittee, thanks for the opportunity to testify
today on FinCEN's CDD (Financial Crimes Enforcement Network
Customer Due Diligence) Rule. It is a particular pleasure to
testify before you, Mr. Chairman and the Ranking Member, with
whom it has been a true pleasure working with you and your
staff on these issues now for some time.
The Clearing House believes that the FinCEN CDD Rule and
its beneficial ownership requirement can provide law
enforcement with useful information as it seeks to learn more
about suspect companies. We particularly appreciate FinCEN's
decision to grant financial institutions some flexibility in
how they collect and certify beneficial ownership information,
which was the product of a laudable notice and comment process
by FinCEN.
We do, however, have one primary concern with the final
rule and broader concerns about guidance used to interpret it
and the examination process that is expected to enforce it.
As for the rule, it requires covered financial institutions
to reconfirm the beneficial owners of a customer each time the
customer opens an account. This requirement is burdensome for
customers that routinely open multiple accounts on the same day
or within a short period of time. For example, title companies
can open multiple accounts daily to assist in closing real
estate transactions, and large companies frequently open
accounts for many reasons.
The cost in customer inconvenience of reconfirming
ownership with each new account do not appear to come with any
corresponding benefit, as there generally is no reason to
believe that the opening of a new account is evidence that the
ownership of the customer has changed.
The new account requirement is complicated further by
guidance released by FinCEN on April 3 in the form of FAQs.
While the Clearing House generally appreciates FinCEN's efforts
to provide additional guidance, unfortunately, in some areas,
the guidance has expanded rather than interpreted the final
rule in unexpected ways.
Most significantly, FAQ 12 states that even the rollover or
auto renewal of an account, for example, a deposit or a loan,
constitutes a new account. Again, there is no reason to believe
that the rollover of a 1 month CD is evidence of a change in
ownership in the customer.
Since adoption of the CDD Rule in 2016, financial
institutions have invested millions and rebuilt their internal
systems, which would need to be significantly modified to
accommodate this direction which came only 1 month before the
go live date.
The FAQ 12 guidance is even more troubling, given that
these products include contractual provisions that require
financial institutions to auto renew for customers without
interruption. Therefore, on May 11, financial institutions will
be forced to choose between breaching their contracts with
customers or following the FAQ.
We note that FinCEN in its FAQs has attempted to resolve
this issue by providing that, during the initial certification
of beneficial ownership, the customer can simply agree to
notify of any future change. We hope and expect that FinCEN
will revisit the question of existing accounts where that
agreement has not already been obtained. However, even as
FinCEN considers this issue, we are quite concerned that
examiners at the regulatory agencies will treat guidance as a
binding rule and cite banks for violations of law for honoring
their contracts in their traditional zero tolerance approach to
AML (anti-money laundering) compliance.
Of course, new beneficial ownership requirements for banks
highlight the need for broader legislation to prohibit the
formation of anonymous companies, as many criminals launder
money by forming LLCs and using them to hold real estate or
other valuables, all without even touching the banking system.
For this reason, we continue to support your legislation ending
anonymous ownership of U.S. companies.
With respect to implementation of the CDD Rule, we believe
that FinCEN compliance examinations--BSA (Bank Secrecy Act)
compliance examinations should follow FinCEN's rule and not
seek to amend or interpret it, either at the agency level or
through ad hoc examiner judgment. For example, public reports
have indicated that the banking agencies have considered
directing institutions to collect beneficial ownership at a 10
percent equity threshold in some cases. However, FinCEN was
very clear in its rule that the standard is 25 percent.
More broadly, my written testimony describes the profound
dysfunction in the current AML regime where banks are judged on
SARs (suspicious activity reports) they don't file, rather than
the value of the ones they do, where no priorities are set and
where the hallmarks of the regime are box checking and
compliance for compliance's sake.
The result is a system that is doing far less to assist law
enforcement and national security than it could, and a system
with extraordinary collateral costs, everything from pushing
LMI customers out of the banking system and into the hands of
check cashers and payday lenders, to forcing global banks to
exit certain countries or regions at risk of sanction.
In the now 2 years since we began raising these issues, it
has been gratifying to see the building of a broad bipartisan
consensus that major changes are necessary to the system. But I
am sad to report that, by all accounts, nothing much has
changed in the banking agencies' examination and enforcement of
the regime. Hearings like this and the draft legislation under
consideration are important steps in turning this consensus
into real reform.
Thank you very much.
[The prepared statement of Mr. Baer can be found on page 30
of the Appendix.]
Chairman Luetkemeyer. Thank you, Mr. Baer.
Mr. Greene, you are recognized for 5 minutes.
STATEMENT OF CARLTON GREENE
Mr. Greene. Thank you, Mr. Chairman. I appreciate the
opportunity to address the subcommittee.
My name is Carlton Greene. I am a Partner at Crowell &
Moring. I am formerly the Chief Counsel of FinCEN. Before that,
I served a number of years at Treasury working for the Office
of Foreign Assets Control on sanctions activities against--U.S.
sanctions regimes against Iran, North Korea, transnational
criminal organizations, and terrorist actors.
So since leaving FinCEN, I have been now 2 years in private
practice working in the economic sanctions and anti-money
laundering areas, primarily for financial industry clients. And
I think it has given me a balanced view on the critical mission
that FinCEN plays, but also the enormous efforts that private
industry puts into complying with the Bank Secrecy Act, the
burdens associated with it, how seriously that they take it,
and how much they work every day to try and comply with it,
much of which is not seen by regulators.
There are just a few points I wanted to make today. One is
that I think the CDD Rule represents a very important advance
in the information available to FinCEN. Information on
beneficial owners, I think, will allow FinCEN to draw all kinds
of connections that were not previously available to it in the
fight to detect and deter financial crime. I think that is
critical information.
I think that FinCEN deserves credit for having gotten this
rule across the line. This is a rule that has been 10 years in
the making. FinCEN conducted extensive public outreach
associated with the rule. It incorporated a lot of the comments
that industry provided. It showed a willingness to engage with
folks and have a real back-and-forth dialog.
I also think that the FAQs that FinCEN put out, again, show
considerable responsiveness to the concerns that industry
raised about the rule and the questions that they had about the
rule.
I think that kind of partnership bodes well for the future
of the rule and its implementation.
On the banking side, I think that banks and other covered
financial institutions, likewise, put an enormous amount of
effort into informing FinCEN's work on the rule, helping it to
understand what kind of ideas would impose impossible burdens
on the industry or otherwise wouldn't generate the kind of
benefits FinCEN was hoping for.
I know that the CDD Rule comes on top of the many burdens
that these institutions already face. And I know firsthand,
from my experience in private practice, how much time, effort,
expense goes into maintaining AML compliance programs, much of
which is never seen by regulators.
I know also that the professionalism with which every
financial institution I have dealt with has approached this
issue. So I think there is a lot of credit to be given on both
ends.
A few points about the rule itself and about the future of
the AML regime. I think the FAQs, although they provide
important interpretive guidance and have solved a number of the
problems raised by industry about the rule, there are a number
of compliance questions that still remain out there, and I have
given a list of several of these in my testimony.
My hope is that FinCEN will continue to work closely with
the regulating community to address these questions to provide
public guidance where possible on them, but always to listen
and offer its thoughts on the approach to these so that
industry knows the way to go forward and that implementation is
reasonable and possible.
I also hope that in the early years of implementing the
rule, that they will be lenient about enforcement,
understanding the inevitable but unexpected obstacles that will
arise.
The second point I wanted to raise is a broader issue about
AML regulation and relates to FinCEN's relationships with the
prudential banking regulators. One of the concerns I have, and
I think I share with Mr. Baer, is that because FinCEN has
delegated examination authority to the Federal banking
regulators--the Federal functional regulators, I should say,
more broadly, and because these agencies have their own--use
their own independent authorities to enforce Bank Secrecy Act
obligations, I think there is some risk there that there will
be divergent interpretations of the Bank Secrecy Act or that
enforcement priorities across all these different agencies will
not necessarily line up with those that most advance FinCEN's
mission of detecting and deterring financial crime.
FinCEN, I think, is uniquely positioned in that it has
access to financial threat information and it also understands
the regulatory process. And I think it is uniquely positioned
to balance those two together to ensure that enforcement is
calibrated to the actual needs to address financial threats. In
the absence of that dual knowledge, I think there is a
potential for overly formalistic enforcement of the Bank
Secrecy Act.
I am happy to comment further if needed. Thank you.
[The prepared statement of Mr. Greene can be found on page
42 of the Appendix.]
Chairman Luetkemeyer. Thank you, Mr. Greene. I appreciate
your testimony.
Mr. Kalman, you are recognized for 5 minutes.
STATEMENT OF GARY KALMAN
Mr. Kalman. Chairman Luetkemeyer, Ranking Member Clay, and
members of the subcommittee, thank you for the opportunity to
appear before you.
On behalf of the Financial Accountability and Corporate
Transparency (FACT) Coalition, I appreciate the opportunity to
discuss FinCEN's Customer Due Diligence Rule and the importance
of collecting beneficial ownership information.
This remains a critical element in the larger effort to
address grand corruption and the nexus between secrecy
jurisdictions, crime, corruption, human rights, and national
security. FACT Coalition is a nonpartisan alliance of more than
100 State, national, and international organizations working to
combat the harmful impacts of corrupt financial practices.
Before addressing the particulars of the CDD Rule, I
thought it was important to review why the collection of this
information matters. As detailed further in my written
testimony, the rule is a positive step forward, but falls short
of what is needed to protect the integrity of our financial
system.
Anonymous companies have become the vehicle of choice for
drug cartels, organized crime, corrupt foreign officials, and
others who need to launder money. These entities are able to
profit from these funds, prop up their regimes, and engage in a
host of harmful actions.
A few quick examples. A Moldovan gang used anonymous
companies from Kansas, Missouri, and Ohio to trick victims from
overseas in a $6 million human trafficking scheme. Traffickers
in counterfeit and other illicit goods and services often hide
behind corporate entities to make it more difficult for
legitimate businesses to honestly engage in global commerce.
As Congress considers new sanctions to counter North Korean
threats, the committee should take note of a U.S. Department of
Justice case charging a Chinese national and several colleagues
with violating U.S. sanctions laws by working with a
blacklisted North Korean bank to set up shell companies in Hong
Kong and elsewhere to hide the business they were doing with
North Korean companies that helped them to develop nuclear
weapons.
We agree on the need for the CDD Rule as a step toward a
comprehensive approach to prevent the abuse of anonymous
companies and launder money through our financial system.
The rule was published in 2016. Financial institutions have
had 2 years to prepare for the implementation of the rule. Many
U.S. financial institutions already routinely collect
beneficial ownership information as part of their know-your-
customer obligations. We do not see a need for the delay in the
implementation of the rule. We have no position on whether or
not, if there are good-faith efforts that have been made by
financial institutions, to have reasonable accommodation on
enforcement actions.
The Coalition does have a concern about the rule's
definition of beneficial owner. The rule does exclude the
concept of entitlement to funds, thereby enabling a corporate
officer to be deemed the beneficial owner of a corporation.
That officer has no ownership rule or entitlement to the
corporation's funds.
The Coalition favors a consensus definition that was
already approved overwhelmingly by Congress in last year's
National Defense Authorization Act. In the NDAA of Fiscal Year
2018, a provision was included to require the Department of
Defense to collect beneficial ownership information when
leasing high-security office space. That definition, with its
focus on natural persons who ultimately control or benefit from
a legal entity, is important to prevent the shell games in
which one company owns another, which in turn owns another and
so on, all to obfuscate the name of the individuals who
exercise ultimate control.
The rule is only one part of an overall strategy to address
the abuse of anonymous companies. Bad actors have established
U.S. companies to purchase real estate, aircraft, and other
large ticket items with cash. Companies have been created in
the U.S. only to route money from one jurisdiction to another,
bypassing the U.S. banking system.
While financial institutions represent the largest
gatekeeper to the U.S. financial system, they are not the only
gatekeepers. And as such, Congress should be looking beyond the
rule.
There are at least two proposals currently pending in the
House Financial Services Committee to strengthen corporate
transparency by improving beneficial ownership disclosures.
We thank Chairman Luetkemeyer for his leadership, along
with Chairman Pearce, for sponsoring the Counterterrorism and
Illicit Finance Act; and Representatives Pete King and Carolyn
Maloney for cosponsoring the Corporate Transparency Act. Both
proposals require companies to name the beneficial owners at
the time of formation and both include language consistent with
last year's NDAA.
The CDD Rule, the NDAA provision, and Treasury's geographic
targeting orders are all important steps. But they are not a
substitute for a consistent national standard that levels the
playing field for all States and corporate entities.
Thank you, and I look forward to any questions.
[The prepared statement of Mr. Kalman can be found on page
45 of the Appendix.]
Chairman Luetkemeyer. Thank you, Mr. Kalman.
Ms. Martinez, you are recognized for 5 minutes. Welcome.
STATEMENT OF DALIA MARTINEZ
Ms. Martinez. Chairman Luetkemeyer and members of the
subcommittee, I am honored to have this opportunity to present
testimony today.
I am Dalia F. Martinez, Executive Vice President and
Corporate Bank Secrecy Act Officer for International Bank of
Commerce. IBC Bank-Laredo is a member of International
Bancshares Corporation, a $12.2 billion multibank financial
holding company in Laredo, Texas. We have 192 branches and more
than 294 ATMs serving 90 communities in Texas and Oklahoma.
I am speaking to you today representing the Mid-Size Bank
Coalition of America (MBCA), the voice of 88 community banks
with headquarters in 34 States. MBCA banks are primarily
between $10 billion and $50 billion in assets, with more than
10,000 branches in all 50 States with deposits of $1.2
trillion. MBCA banks represent, service, and support millions
of customers.
I have held the position of BSA Officer at IBC for more
than 27 years. BSA compliance is a top priority for us, and I
have seen firsthand how BSA regulations have evolved, the
burden they have placed on our bank, and how these regulations
have sometimes ended up harming, rather than helping, our most
important asset, our customers.
I would like to focus on four points in my testimony today.
First, compliance with the CDD Rule is very expensive and
burdensome. IBC has spent 2,912 hours in design and testing,
7,859 hours in training 2,142 employees and officers preparing
to comply with this regulation. These expenditures are on top
of the $5 million a year we currently spend to comply with
existing BSA/AML regulations.
Every hour a bank employee spends on regulatory compliance
is an hour that employee is not able to spend on what we value
most: Helping our customers achieve financial success.
Second, the CDD Rule has many gray areas that are difficult
to implement. Let me provide you an example that illustrates
this. Bank frontline employees who are typically not schooled
in complicated business structures are required to capture
beneficial ownership information when an account is opened. But
the individual opening the account on behalf of the company is
usually a control person at the company and not the actual
business owner. While in some cases the control person may have
knowledge of the ownership structure of the company, they often
will not have the identification required for the CDD
requirement. This may result in accounts being turned away and
delays in opening accounts.
Third, the rule puts a burden on banks to ensure the
information the customer provides is accurate. But banks are
not given the tools they need to make that determination. Banks
can rely on the information that customers disclose about the
ownership structure of the company, only so long as the
financial institution does not have knowledge of facts that
would reasonably call into question the reliability of the
information. However, FinCEN does not define having knowledge.
Financial institutions have millions of records. Are we to
comb through all our records to ensure information provided on
a beneficial ownership attestation does not conflict with a
document that already exists within the bank?
Unlike some countries, the United States does not maintain
a national database of business ownership information that a
financial institution can rely on. Tools and guidance from
FinCEN designed to help banks verify customer information are
needed.
Fourth, while FinCEN has provided some guidance to banks in
the form of FAQs, some of the FAQs are not clear, and others
create an even greater burden on banks and, ultimately, bank
customers. One such example is with certificates of deposit
that auto renew. These CDs are for a specific term and rate.
Upon maturity, the CD renews and the customer never has to come
to the bank, as renewal information is mailed to the customer.
FinCEN FAQs state that upon the first auto renewal of a CD
established prior to May 11, 2018, the financial institution
must obtain the beneficial ownership and CDD information. This
means banks will need to contact their customers to try to
obtain the beneficial ownership information.
From my 39 years in banking, I can tell you, customers do
not update their phone records and email addresses with the
bank on a regular basis. Therefore, we will mostly like have to
rely on mail. If the customer does not respond to the bank's
request, are we to return the funds to the customer or track
exceptions?
Every time a bank makes an exception, the exception is
tracked for BSA exam purposes and is subject to second-guessing
after the fact. Again, this reality will lead to even more de-
risking, which will harm bank customers, especially small
business customers who are not exempt from any of these
regulations.
In closing, on behalf of IBC and MBCA, I hope I have
conveyed to you that regulatory costs and burdens imposed on
banks affect our Nation's small businesses.
It is critically important that FinCEN provide clear and
effective guidance; otherwise, our prudential regulators will
be left to their own interpretations, and ultimately, this will
result in customers simply being driven out of the traditional
banking system.
Thank you.
[The prepared statement of Ms. Martinez can be found on
page 56 of the Appendix.]
Chairman Luetkemeyer. Thank you, Ms. Martinez.
With that, we will begin our questions. I will recognize
myself for 5 minutes.
One of the concerns that we have had--and Chairman Pearce
and I are working on a BSA/AML bill, and part of it is to get
this beneficial ownership situation resolved.
One of the problems that we see is that the banks are being
deputized to become law enforcement officers by this rule from
Treasury, and it is costing literally millions and millions of
dollars. One large bank I was talking to actually has over a
thousand employees that do nothing but take care of BSA/AML,
and now they are going to have to deal with this beneficial
ownership situation.
So, Mr. Greene, you tell me that you have been involved
with FinCEN for quite some time, and you like the rule,
according to your testimony. Can you tell me, do you think
FinCEN could be able to collect information by themselves? That
is what we proposed in our bill. Is that going to work or not?
Mr. Greene. Thank you, Mr. Chairman. If by that you mean if
they were to collect beneficial ownership directly themselves--
Chairman Luetkemeyer. Right.
Mr. Greene. --and to make use of it. Yes, I think that is a
possibility.
Chairman Luetkemeyer. That is a viable solution. Is that
what you are saying?
Mr. Greene. It is potentially a viable solution, yes, sir.
And I also think that speaks to a separate issue, which is that
there is only so much that financial institutions are in a
position to gather. Putting aside the burden, just as a
practical matter, I think Mr. Baer mentions some of the
circumstances that as useful and as important as the CDD Rule
is, there are types of information--companies that will not be
covered by it in terms of beneficial ownership information. And
that would include, for example, an LLC that is established in
Delaware but keeps its accounts overseas and directs its
operations overseas. That would not be covered by the CDD Rule
because it would not be banking with a U.S. financial
institution.
Chairman Luetkemeyer. I had my taxes filled out during
the--about a month ago. And I asked my accountant, I had this--
we had this situation, this problem. I said, is there another
way that FinCEN could collect the information? And he said the
IRS already has all this beneficial ownership information. And
since IRS is within the Treasury Department, which is where
FinCEN is, you would think you would be able to just give them
a call and say, hey, can you give us this information with
regards to the XYZ company.
Is that a viable solution?
Mr. Greene. Thank you, Mr. Chairman. I have not--I will
confess I have not looked at the specific beneficial ownership
information available to the IRS. I do know that, in the past,
there have been legal impediments to using taxpayer information
for purposes of financial threat analysis on the FinCEN side.
Chairman Luetkemeyer. OK. So according to my accountant,
they already have this information, because you have to file it
when you file your tax returns. So if we could do something in
the bill, for instance, to say something to the effect that we
would allow FinCEN to have access if they have some sort of
cause to be able to go looking for this information, would that
be a viable solution?
Mr. Greene. Certainly, I think that FinCEN could make very
good use of any beneficial ownership information that might
already be in the Government.
Chairman Luetkemeyer. That would certainly streamline
things, wouldn't it?
Ms. Martinez, you were adamant in your discussion here and
your testimony a minute ago with regards to concerns you had
about, and to me it is a real problem, with regards to de-
risking. And some of the banks, that they just, in order to get
rid of this problem, may just not take these kinds of customers
on.
Would you like to elaborate a little bit on the de-risking
problem here? We see this throughout all sorts of other things
going on right now, and seems like we are compounding the
problem here with this rule.
Ms. Martinez. Thank you, Chairman. Yes, that is very true.
The issue of de-risking is very real in all financial
institutions, and it is primarily a result of the fact that
there is not definitive guidance. And so individual examiners,
from exam to exam, may change their position on how they
evaluate certain types of accounts and the requirements that
they ask the banks to follow for documenting risk on these
types of customers.
So at some point, it just becomes too burdensome to
continue to ask for information from the customer, or the
customer just gives up because we are asking for too much
information. And so we de-risk that account or group of
accounts, and that customer goes to another financial
institution and starts all over again.
I don't think that helps our goal here of trying to combat
money laundering.
Chairman Luetkemeyer. My time is about up. I just want to
ask you for one more quick comment. You also talked about the
problem with the lack of clarity with regards to the
guidelines. Would you like to just take a couple of moments and
elaborate on that as well?
Ms. Martinez. Well, I will talk about the 25 percent
beneficial rule. In FinCEN's FAQs, they talk about that the
banks can use another threshold, a lower threshold, for
accounts that they deem higher risk. I think that is very
dangerous that we don't have a bright line, because that will
leave the examiners open to interpretation.
Chairman Luetkemeyer. Thank you very much.
With that, I will go to the Ranking Member, Mr. Clay from
Missouri, for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman. Let me thank the
witnesses for being here.
Mr. Kalman, to what extent does FinCEN's final CDD Rule
address the deficiencies that have been cited by the Financial
Action Task Force as part of its periodic reviews of our
Nation's anti-money laundering and counter-terrorist financing
framework?
Mr. Kalman. Thank you for the question. It addresses some
of it. In fact, the Financial Accounting Task Force has issued
several reports--two--I think one in 2006 and one in 2016,
calling out some deficiencies in our anti-money laundering
regime. They actually did say that we had some very strong
rules, but where we were lacking was in the collection of
beneficial ownership information and in requiring due diligence
requirements upon the gatekeepers to the financial system. That
wasn't just the banks, that was real estate industry,
accounting industry, and some others.
So this addresses a piece of the puzzle to positive steps
forward, we would argue, but it is not complete.
Mr. Clay. During FinCEN's rulemaking process, some
commenters questioned whether the requirement to collect and
verify beneficial ownership information would be more
appropriately placed on State governments responsible for the
formation and registration of legal entities and/or,
alternatively, on a Federal entity such as the IRS or FinCEN.
Can you discuss why it is important to require financial
institutions to collect and verify the beneficial ownership
information of their legal entity customers, and separately, to
also require States, FinCEN or some other Federal entity, to
collect this information as part of the company formation
process?
Mr. Kalman. So actually, as Mr. Greene alluded to, I think
there are two different purposes for the different entities to
collect. So one--as a matter of fact, there is a quote that I
had found when I was preparing for the testimony, from Jennifer
Shasky, formerly of FinCEN. It said the two initiatives, the
CDD Rule and beneficial ownership draft legislation, dovetailed
together. The CDD Rule focuses on financial institutions
knowing who the legal entity customers are regardless of where
the entities are formed. And then the proposed legislation
focuses on making sure the legal entities are formed in the
United States, are more transparent to law enforcement
regardless of where the conduct of the financial activity is.
So there are two separate things; we would argue, both are
important if we are really going to plug the holes.
Mr. Clay. I see. In what way does the CDD Rule complement
proposals pending consideration before this committee to
require the collection of beneficial ownership and information
as part of the company formation process? How does it
complement it?
Mr. Kalman. Again, if law enforcement is to get a full
picture and know both where the legal activity is taking place
and at the State level, we think that both are necessary for
law enforcement to have the full picture. And so we do very
strongly support the proposals in the committee, Mr.
Luetkemeyer's proposal with Mr. Pearce, Mrs. Maloney's
proposal, and we think both are necessary if you are actually
going to look at the full picture and make sure that there are
not loopholes through which the criminals can slip.
Mr. Clay. Now, has law enforcement complained about the
process or do they find it to be effective?
Ms. Martinez, does law enforcement find this process to be
effective or not?
Ms. Martinez. I can only share with you anecdotal
information from law enforcement or FinCEN, and I can also
share with you my own personal experience.
I can tell you that of the thousands of SARs that we file,
I can tell you there are less--I have an example of less than
half a dozen cases that I know of that had actually turned into
some sort of a prosecution. I am not saying the information is
not helpful. It possibly is. However, there is insufficient
transparency from FinCEN to the financial institutions as to
how helpful that information actually is.
Mr. Clay. So you don't get a response back once the
information is turned in?
Ms. Martinez. Very, very, very rarely.
Mr. Clay. I see. My time is about up.
Mr. Chairman, thank you. I yield back.
Chairman Luetkemeyer. OK. We next go with Mr. Tipton from
Colorado, is recognized for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman. I thank the panel for
being here today.
I believe that the Customer Due Diligence Rule is well
intentioned. In my district in Colorado, which has a high
amount of drug cartel activity, its effects will be felt.
Being able to share some of that beneficial ownership
information with law enforcement will help some of the--and
effectively combat bad actors in Colorado and across the
country, which will in turn make some of our communities safer.
That being said, I also believe that the rule needs to be
implemented in the commonsense, harmonized manner that takes
into account the burden of collecting the information and
sharing it with law enforcement and what that will have in
terms of impact on our financial institutions.
Mr. Baer, I would like to start with you. You mentioned in
your testimony that recent guidance from FinCEN detracts from
the clarity and predictability of the CDD Rule. Would you
briefly discuss what clarity, predictability in these kinds of
rulemakings is important for our financial institutions?
Mr. Baer. Sure. Thank you, Congressman. I think just to
start in a most general manner, I think clarity is really
important not just only in the rules in general across any type
of regulation, but particularly in this area where we have this
very odd construct where FinCEN is the rule writer but has
delegated, and I would argue, abdicated responsibility for the
examination of the institutions subject to those rules.
So as I think several of the witnesses have alluded to,
enforcement really comes through an examination process through
the banking agencies and other Federal financial regulators.
They are not regularly in touch with FinCEN, FinCEN does not
set priorities for them, as any other law enforcement or
intelligence agency would, for those who are deputized for
carrying out the activity on the ground.
So that is why in this area we are quite concerned to the
extent that there are any gaps or vagueness in FinCEN's rules
or guidance, because that will be resolved, unfortunately,
through a series of examinations with examiners having
different opinions, potentially agencies having different
opinions, and all with banks being at extraordinarily
reputational enforcement risk to the extent that they get
anything wrong.
So, an example a couple of us talked about with the auto
renewals of CDs, it is effectively impossible for banks in a 1-
month period to produce a system where they are reconfirming a
customer account on a rollover of a CD. So they now effectively
are going to have to be inconsistent with that guidance, which
is not a rule, but really to honor their contracts. But we
don't know what the banking agencies are going to do on the
ground when they examine them.
Mr. Tipton. So it would be fair to be able to say that the
covered entities really don't have a clear understanding of
what areas to be able to focus on to ensure that they can
comply with a CDD Rule?
Mr. Baer. I think in some areas they do, but I think there
are certainly other areas where they do not.
Mr. Tipton. Do you have a comment on that, Ms. Martinez?
Ms. Martinez. I think the regulation is pretty simple, but
the execution of the regulation is very complicated. And so I
think that the current FAQs that are out there, while they are
helpful, they are insufficient.
Mr. Tipton. A consistent theme that we touch on in this
committee is the need for harmonization between the regulators
and the rulemaking. As FinCEN is not the supervisory or
examining agency which you have spoken to in your testimony,
when it comes to reviewing BSA and AML compliance, do you think
that the Federal banking regulators are familiar with the CDD
to conduct fair and effective BSA reviews?
Mr. Baer. I think certainly their task has been somewhat
complicated through the recent FAQs which have opened up some
new issues. I think really time is going to have to tell, I
think as Ms. Martinez indicated, as they fan out to examine the
thousands of institutions subject to this rule, we don't know
what approach they are going to take. I mean, clearly, there
are issues yet to be resolved, and I think FinCEN has every
intention of attempting to be helpful, perhaps providing
further guidance, but they ultimately are not the ones who
decide whether they are going to give a bank an MRA or formally
or informally sanction it for perhaps a technical violation of
this guidance.
Mr. Tipton. I would like to follow up on a comment Ms.
Martinez had mentioned in regards to having a bright line. You
need to know exactly what you are going to be dealing with.
Community bankers in my State of Colorado, they raised a
concern that the rule is going to have a negative effect on
their volume of business when we are talking about having to
re-verify a customer that is just having a CD rollover. So what
are some of the real impacts that you will see in that area?
Ms. Martinez. Well, the problem is that there is one
unanswered question. FinCEN says that the information should be
gathered at account opening. FAQs now say that a CD rollover is
considered a new account opening. And so if we are to gather
that information at account opening, if the customer is not
present, as I described is the case with CD rollover accounts,
then how are we to obtain that information, other than by mail
or some other method?
So if the customer is not present, then the account
technically can't be opened, I am assuming. I am not sure
because FinCEN hasn't been clear about that.
Mr. Tipton. Thank you for your testimony.
My time has expired. Thank you, Mr. Chairman.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentlelady from New York. Mrs.
Maloney is recognized for 5 minutes.
Mrs. Maloney. I want to thank the Chair and the Ranking
Member and all the panelists for addressing this incredibly
important issue. It is one that I have been working on for over
10 years.
The problem that we are trying to address is simple.
Criminals and terrorists, terrorist financing, have always used
anonymous shell companies to finance their operations, because
they never have to disclose who actually owns them. And there
is no way for law enforcement to figure out if a transaction
conducted by a shell company was actually done by a criminal
organization.
It was actually in response to law enforcement in New York
City who came to me with the need to crack down on this,
because they would go right up to the LLC and then they
couldn't get anymore information.
The solution is really a simple one. Companies should have
to disclose their beneficial owners at the time they are
formed. But because no State requires companies to disclose
their beneficial ownership, FinCEN passed a rule in 2016 that
requires banks to identify the beneficial owners of any
companies that open accounts with them.
FinCEN's Customer Due Diligence Rule is very important
because it is the first step toward cracking down on these
anonymous shell companies, and it will ensure that criminals
and terrorists aren't using our financial system to operate
their schemes. But the FinCEN rule by itself is not the
solution.
Ideally, companies would be disclosing their beneficial
owners when they are formed, and then financial institutions
would have access to this beneficial ownership information so
that they can assure themselves that companies that open
accounts with them are not criminals or money launderers.
I would like first to ask Gary Kalman--and we have worked
together on beneficial ownership for years, and I want to thank
you and the FACT Coalition for your constant focus on this.
You noted in your testimony that you believe the FinCEN
rule is important, but it is not sufficient in itself.
If Congress were to pass a beneficial ownership bill, like
the bill I have introduced, would that complement the FinCEN
rule or would it replace the FinCEN rule?
Mr. Kalman. Thank you for the question, Mrs. Maloney, and
thank you for your leadership as well on this issue. We think
that it complements the rule. It is not a replacement. We think
that the legislation you have introduced will cover companies
that bypass the financial system and avoid banks so you are
having much broader coverage.
One thing I would also add which I didn't say before is we
actually also think that it is helpful, and folks on this panel
can correct me if they disagree, but I think they will say that
this is a help with financial institutions, realtors that may
be--if we give access to other gatekeepers to the financial
system, then this helps the entire system function and gives
law enforcement the information and the tools that they need.
So we actually think it is not only good for cracking down
on bad behavior and illegal and illicit activity, but we also
think that it serves as a help to the other institutions we are
asking to help us with cracking down on this.
Mrs. Maloney. And that leads to my next question which I
would like to direct to Mr. Baer. You noted in your testimony
that the FinCEN rule is burdensome for banks because it puts
all the onus on the banks to collect beneficial ownership
information.
And I agree with that statement, particularly mid-sized
smaller banks, they are having tremendous trouble gathering
this information. The responsibility shouldn't all be on the
banks. Banks are required to know their customers, but it
shouldn't have to be this hard to find out actually who they
are. Would passing my Corporate Transparency Act help alleviate
this burden on banks?
Mr. Baer. Congresswoman, yes, absolutely. I think it just
makes common sense. It makes much more sense.
Mrs. Maloney. How much regulatory relief would passing my
bill mean to banks?
Mr. Baer. I think substantial. And it is funny, it is just
so much simpler as a commonsense matter to say at the outset
when you form your company who owns it, and then each bank can
rely on that information, every bank doesn't have to redo that
work.
Mrs. Maloney. And finally, if Congress does pass a
beneficial ownership bill, should the definition of a
beneficial owner in the bill be exactly the same as the
definition in the FinCEN rule? Or should the bill's definition
be broader than FinCEN's definition in order to ensure that all
the beneficial ownership information is compiled?
Mr. Baer, quickly. I am out of time.
Mr. Baer. I think ideally they would be consistent. The one
bad outcome would be if the CDD Rule were broader, because then
compliance with the beneficial ownership legislation would not
suffice for CDD. So some could argue perhaps it should be
broader. But I think ultimately the best idea would be
consistent.
Mrs. Maloney. OK. Thank you.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that, we go to the gentleman from Georgia. Mr.
Loudermilk is recognized for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman.
It is my understanding that financial regulators may expect
institutions to collect beneficial ownership information at a
lower equity interest threshold, and failure to do so may
result in negative examination findings.
In fact, in their latest FAQs, FinCEN states that, and I
will quote, financial institutions may reasonably conclude that
collecting beneficial ownership information at a lower equity
interest than 25 percent would not help mitigate the specific
risk posed by the customer or provide information useful to the
financial institution in analyzing the risk. Rather, any
additional heightened risk could be mitigated by other
reasonable means, such as enhanced monitoring or collecting
other information, including expected account activity in
connection with the particular legal entity customer.
Mr. Baer, what risk posed by the customer may be mitigated
by collecting beneficial ownership data at a lower threshold?
Mr. Baer. Thank you, Congressman. We strongly support a
bright-line rule of 25 percent. We believe that is the clear
intent not only of the CDD Rule, but also the guidance issued
by FinCEN. And we believe, in just about every case, that is
certainly sufficient to have people on the hook and searchable
by law enforcement. If they are interested in a company and
want to know who owns it, a 25 percent threshold, we believe,
is sufficient.
There certainly may be cases where monitoring or
investigation of a company leads you to believe, well, this is
a case where people have below 25 percent ownership, but there
is some reason to think maybe they are acting in concert, or
something like that, where, yes, we would want to have
reporting at a lower level. But we believe strongly that should
be on a facts and circumstances basis, on a risk basis by an
assessment by the financial institution and that that rule
shouldn't get rewritten by guidance or interpretation.
Mr. Loudermilk. Right.
Ms. Martinez, do you have any thoughts on this?
Ms. Martinez. I think that most of my colleagues would
agree that financial institutions take this responsibility very
seriously, and we are personally responsible for the programs
in our bank. So when we see risk, then we want to address that
risk. And I agree that we should have a 25 percent bright line.
But it should be up to banks to decide if, on a risk-based
approach, they should look at an account differently. I don't
think that that should be left to examiners, because individual
examiners have different types of customer groups that they
just are concerned about, and so then they force banks into
lowering thresholds that are not clearly defined by the
regulation, and that hurts customers.
Mr. Loudermilk. OK. Mr. Baer, would lowering the threshold
provide additional information that would otherwise be more
useful to you in analyzing the risk?
Mr. Baer. Again, Congressman, I think generally the
consensus, and certainly, I mean--I should emphasize FinCEN did
a very rigorous and comprehensive notice and comment rulemaking
on this, and I think ultimately they concluded, as I think most
financial institutions concluded, that 25 percent threshold is
appropriate, it strikes the right balance, and that is enough
to know about the ownership of a company.
Again, there can always be cases where banks may have
reason to investigate further, but we think that suffices for
law enforcement purposes.
Mr. Loudermilk. One quick follow up. If a financial
institution chooses to collect beneficial ownership information
to the 10 percent level on some high-risk customers, they must
then clearly distinguish to which high-risk customers a lower
threshold would be applied and choose how soon that information
must be completed after the high-risk designation.
So what if the customer fails to comply or fails to comply
in a timely manner? Will the financial institution close the
account because the customer is not cooperative, even though
the actual regulatory requirements for the collection of
beneficial ownership information have not been met--or have
been met?
Mr. Baer. I may defer to Ms. Martinez on this. My
assumption is that if the customer would refuse to provide that
information, in all likelihood you would file a SAR and then
perhaps close the account.
Ms. Martinez. You just described one of the primary reasons
that banks de-risk.
Mr. Loudermilk. OK. Thank you.
I yield back, Mr. Chairman.
Chairman Luetkemeyer. The gentleman from Georgia yields
back.
With that, we go to the gentlelady from California, the
Ranking Member of the full committee. I am going to recognize
her for a point of personal privilege, and then we will
recognize her after that for 5 minutes of questions. She is now
ready to go.
Ms. Waters. Thank you very much, Mr. Chairman and Ranking
Member.
Before I begin the questions, I would like to first
recognize the hard work of one of my staffers, Kirk
Schwarzbach, as today is his last day, after more than 10 years
on the committee. Kirk came to the committee in 2008 and
started at the front desk. Today, he now manages a portfolio
that spans monetary policy, currency and coins, various
consumer protection issues, international development, and
counter-terrorism and illicit finance.
Beyond being a brilliant individual, Kirk is also very
friendly, warm and caring. His compassion to advocate good
policy on behalf of Americans he may never meet is only
surpassed by his dedication.
Kirk is not going far, as he is going to be joining the
Congressional Affairs Office at the Federal Reserve. But
certainly we are going to miss him.
Thank you, Kirk.
Chairman Luetkemeyer. The gentlelady is now recognized for
5 minutes for questions.
Ms. Waters. Thank you very much.
As you know, FinCEN began the process of developing its
Customer Due Diligence Rule in March 2012, and it was more than
6 years ago when it issued an advance notice of a proposed
rulemaking. After a 4-year rulemaking process in 2016, FinCEN
finalized the CDD Rule and provided covered financial
institutions a 2-year delay before they would have become
compliant, which will be on May 11, 2018.
Do you believe that this 2-year delay was adequate with
respect to giving banks time to put the necessary processes in
place to collect this information? And this is for Mr. Kalman.
Mr. Kalman. Thank you for the question. As I said in my
testimony, we think that it is reasonable. Banks have had 2
years to comply with the rule, and it is reasonable for the
rule to go into effect. We don't see a need for delay.
I did also say, for banks that--if there are banks that
have ignored the rule and didn't do anything, then they need to
do so. But for those banks that did take good-faith efforts and
there is some misinterpretation--not misinterpretation, that is
the wrong word--if there are some banks that because of the FAQ
that has created confusion feel that they are not in
compliance, we don't take a position on a reasonable time-
specific accommodation in terms of enforcement.
Ms. Waters. OK. I am going to move on.
Mr. Kalman, also in your testimony, you emphasize how
criminals can use shell companies to facilitate their illicit
activity. How would CDD Rule and beneficial ownership
legislation help curb the flow of illicit funds by criminals,
kleptocrats, human traffickers, and terrorists?
For example, in 2013, prosecutors in New York charged 34
alleged members of Russian-American organized crime groups with
a range of racketeering activities, which includes one group
that was alleged to have moved millions of dollars in illicit
funds to a network of shell companies in Cyprus and the United
States. Would the CDD Rule or beneficial ownership legislation
prevent this?
Mr. Kalman. So in my written testimony, and let me
highlight it here, I think it is a critically important issue
for us to be raising here that this is not an administrative
exercise, that this impacts real issues that threaten the
financial system and individuals in our society. The issues
range from, as you said, national security issues, kleptocrats
hiding money. We also see it in the opioid epidemic, anonymous
shell companies used to move illicit drugs, human trafficking
examples. We recently had Polaris, one of the largest anti-
human trafficking organizations join our coalition specifically
because law enforcement can't follow the money.
There are numerous examples, and the legislation that you
have cosponsored with Mrs. Maloney would crack down on this,
and we think it would have a foundational impact on these
issues and lead law enforcement to better be able to crack down
on the wrongdoing.
Ms. Waters. I am a bit curious. Cyprus comes up quite often
when we are talking about shell companies or when we are
talking about money laundering. Do you have or know or
understand information about what is going on with Cyprus and
its role in money laundering and shell companies?
Mr. Kalman. There may be others that--Mr. Greene has more
information on Cyprus. Let me say one thing that I do think is
important because it has come up in numerous conversations,
very quickly, that the issue is if we close down our system to
this money laundering, won't they just go overseas to some of
these other jurisdictions, whether it be Cyprus or the Cayman
Islands or what have you.
I would like to say that the European Union and many of our
allies have already moved to collect this information. If we
voluntarily choose to move forward and do the same, the
remaining nations, I have been told, would follow suit. Right
now, those places like Cyprus, the Cayman Islands, BVI, what
have you, all point to the United States saying why should we
do this if the United States doesn't?
So we do believe that if we take leadership in this, the
rest of the world will follow and we can actually have a
substantial impact globally.
Ms. Waters. Does anyone else have something quickly to say
about Cyprus?
Mr. Greene. Yes. Thank you, Congresswoman. I would just say
that I think Cyprus has been an attractive jurisdiction for a
variety of actors because it is seen as a favorable
jurisdiction for offshore banking and also one that protects
the privacy of companies that are established there, sometimes
referred to as bank secrecy jurisdictions. I think you can see
that sometimes that can go awry, as has happened in the recent
designation of FBME by FinCEN for 311 sanctions.
Ms. Waters. Thank you. I yield back.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that, we go to the gentlelady from Utah. Mrs. Love is
recognized for 5 minutes.
Mrs. Love. Thank you. Thank you so much for being here
today.
I have heard a little bit of consternation about this rule
from the banks in my State who don't think that they are best
positioned or the best positioned entity to gather this due
diligence, and they wonder why this due diligence isn't
conducted by the various States, corporations, departments
which register the business.
On the other hand, banks have already been forced to
develop extensive FinCEN compliance procedures, and this would
seem to just add new wrinkles to those existing procedures.
I would like to hear your thoughts on the relative merits
of having banks conduct this particular form of due diligence.
The burden has to fall somewhere, but I guess I am just trying
to figure out why the banking institution has to be the place
where it goes.
Mr. Baer. Thank you, Congresswoman. The CDD Rule is
actually broader than just beneficial ownership. It involves an
obligation to know the customer and monitor for suspicious
activity, and to do that you actually have to know who are you
monitoring.
So the question is when you start with who the beneficial
owners are, is that something the bank should have to do and
each bank do potentially for the same customer over time? Or is
that something that just should be collected, as the
legislation would intend, at the outset of the formation of
that company?
I think banks would tell you they are not trying to avoid
their CDD requirements, but it certainly would be much more
efficient and probably more accurate if they could just draw on
a database, I think the draft legislation envisions FinCEN, and
just go to that database and say, OK, here are the beneficial
owners of this company, and that is who I am going to monitor
for suspicious activity.
Mrs. Love. Ms. Martinez, what kinds of resources does an
institution need to devote to this additional rule, and how
does this affect cost to the institutions?
Ms. Martinez. So I talked about this in my opening
statement. Just for IBC, we have spent 2,912 hours just
designing and testing all of our programs and our policies. And
it has taken us about 7,800 hours to train our employees on
this new rule. And this is an ongoing effort because there is
still not enough clarity.
Mrs. Love. Right.
Ms. Martinez. I would like to address your point on why the
burden is on the banks and not on the States.
I am in Laredo, Texas, which is on the border of the U.S.
and Mexico. And I will just use Mexico as an example. I am not
saying or advocating that this is what we should do, but just
as an example of what Mexico does. And they have done this for
many, many years.
Every state in Mexico is required to register businesses.
And financial institutions can rely on that information. And
that beneficial ownership information is at 1 percent and
above.
Mrs. Love. OK.
Ms. Martinez. And if there is a change to that company
structure, there is a formal Federal process that the company
has to go to to register those changes.
Mrs. Love. OK.
Ms. Martinez. So I think we should be partners with the
States and we shouldn't bear the entire burden.
Mrs. Love. Instead of trying to do two separate--OK. So
what areas should FinCEN and the regulators be working on to
address the--you talked about clear understanding. And that
clearly is an issue.
So what do you think the areas should FinCEN focus on so
that we can address that, first and foremost, because that, I
can see already, using resources and trying to figure out what
information, clear direction on what to do. So--
Ms. Martinez. I think there are two that come to my mind
right away. And the first one is this issue with the auto-
renewable CDs.
So if you are a business customer and you bank with four
different banks in your city, and you have four different CDs
that all auto renew at a different time, you are going to be
required by your financial institution to provide beneficial
ownership information the first time that that CD renews after
May the 1st. So four different beneficial ownership
attestations will need to be provided.
So if you are a larger business and you have four
certificates of deposit and four checking accounts, and then
you have a change to your organizational structure, now you
have to go to four different banks to make those changes. And
that is a, I think, a burden on our small businesses that are
not exempt by this regulation.
Mrs. Love. OK. Thank you.
And on the flip side, what actions should FinCEN and
regulators take to ensure financial institutions aren't
overcollecting information? I mean, you are thinking about
different information that has to happen very quickly. You have
different entities. How do we ensure that there is not
overcollecting?
Ms. Martinez. Well, I think that is a very good question,
and I think we should all ask FinCEN that question. The problem
is also that not only are all the financial institutions having
to collect all this information, but it is not going to be used
unless we receive a subpoena. And there is nothing to verify it
against.
Yes, there is verification for identification of the
beneficial owners, but there is no corporate document that
banks have to verify the percentage of ownership that the
customer is attesting to. So how valuable will that information
even be to law enforcement?
Mrs. Love. Very insightful. Thank you so much.
I yield back, Mr. Chairman.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that, we go to the gentleman from Washington. Mr.
Heck, you are recognized for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman.
First, I would like to start off by saying in the 5 years
and 4 months I have had the privilege and honor to sit on this
committee, we have received testimony from an incredible number
of interesting stakeholders, ranging from consumers seeking to
protect consumers to those who are regulated.
In all that time, Ms. Martinez, I don't think I have ever
seen testimony presented as strong and clear and supported as
yours. You are a credit to your profession, and I just wanted
to thank you for that.
I also want to say that when I talk to bankers back home
about compliance, and I do all the time, I ask them, what is
really frustrating you? What is getting you down? And every
single one says BSA and AML. Every single one. And I have come
to the conclusion, as somebody not from the industry, except I
had a cup of coffee in it 40 years ago, that it really is borne
of two factors.
And the first of which seems to be it is a one-way ratchet,
and it is getting tighter and tighter. Requirements are always
getting more difficult, and there isn't any countervailing
effort within the regulatory context to seek to ease that, it
seems to me, or to lighten BSA compliance in other ways.
And second is that it is, as alluded to here earlier, just,
frankly, not very transparent.
The bankers in my district, as Ms. Martinez reflects,
really believe in the mission of BSA, and nobody doubts that.
And they put a lot of time and effort into complying with it.
Thank you for documenting it again, Ms. Martinez. But they have
no idea if they are helping. They really don't. Not a single
one of my community bankers, not one, has ever told me that
they have received a follow up from a law enforcement agency on
a SAR or a CTR. Not one.
So the first problem, I think, about the one-way ratchet is
at least partially on us. We contribute to this here in this
institution, unfortunately. We have been ignoring this hue and
cry and the recommendations that we back down some. Part of the
evidence of that, to invoke the 800-pound elephant in this
room, is that both chambers have passed packages of major
regulatory relief. And we hear a lot from, back home, about the
need to do this. Not one line, not one section, not one
provision relating to BSA/AML. The number one complaint:
Nothing is being done in it.
And I am not pretending like this is easy. It is a Gordian
knot. My friend, Mr. Luetkemeyer, has been working on this for
a couple of years. I know it is hard.
So the second problem is really what I want to quickly,
since I have managed to speak for most of my time, get your
thoughts on, and that is the issue of just how darned effective
is the Bank Secrecy Act. How efficient is it? Is anyone reading
SARs that are filed? Does anyone review the CTRs, or are they
just kept in a database to be used if there is a lead that
comes up?
And if nobody is reading them, does it make more sense to
just have the banks keep it and make it available should
somebody need it? Or if people are reviewing the reports, for
which I haven't received much evidence, indications otherwise,
and acting on leads that they generate, what can we do to
demonstrate to the people like Ms. Martinez that all of their
time, effort, and money devoted to this is actually making a
difference?
That is a big mouthful of questions. Mr. Greene, you win. 1
minute and 16 seconds.
Mr. Greene. Thank you, Congressman. I appreciate the
opportunity to answer this question having been inside FinCEN
and seen the value of SAR reporting.
I think you touch on an issue that FinCEN, I know during my
time there, was very concerned about, which was the lack of
feedback about the value of SARs and their utility.
I can tell you from having seen inside of FinCEN, SARs are
immensely useful, and so is a lot of the other reporting that
is required under the Bank Secrecy Act.
I was particularly impressed by their use in combating
terrorism and in informing investigations related to terrorist
attacks, both abroad and also activities within the United
States. And so I think they play a critical role.
But I think that there is some regulatory fatigue that has
set in among the regulated financial institutions that have to
comply with the Bank Secrecy Act, and they need to understand
the value of those SARs, number one.
So it would be nice to have some method of feedback to
industry to explain to people when a particular SAR has been
useful, that would require some collaboration with law
enforcement. But more broadly, I also think there needs to be
some flexibility in the approach to enforcement of the BSA
requirements so that we are really focusing on enforcing
against parts of AML programs that really address the
particular threats that the country is facing at any given
moment.
Thank you.
Mr. Heck. Thank you sir.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentleman from Texas. Mr. Williams
is recognized for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman. And thank you for
holding today's hearing.
Criminals and other bad actors wishing to do harm to
Americans have used the U.S. financial system for many years to
hide their illicit activities. Because of this abuse, it has
always been important for financial institutions to remain
vigilant, and that is why anti-money laundering and counter-
terrorist financing regimes are so crucial.
Implementation of the FinCEN Customer Due Diligence Rule is
rapidly approaching, as we have talked about. And so testimony
from the various stakeholders and experts before us will be
crucial in determining whether or not we are on the right
track.
So the first question to you, Ms. Martinez, and I would
like to add, you work for a great group of folks.
Ms. Martinez. Thank you.
Mr. Williams. I understand that the bank that you are with
devotes a lot of resources to complying with BSA regulations.
And as one of the key components of BSA compliance is the
filing of Suspicious Activity Reports, or SARs, as we have
talked about. So how does your bank identify potential SARs
filings? And further, do you find that the information you
provide law enforcement is useful to them? And do they give you
any kind of feedback at all, as we have spoken?
Ms. Martinez. So I have been told that this is my hobby
horse, so thank you for asking me that question. At the bank,
and most financial institutions work this way, we have a
surveillance system. And this surveillance system is made up of
a series of rules that have various thresholds on different
types of transactions. We review hundreds of thousands of
alerts on an annual basis. Those hundreds of thousands of
alerts give us several thousand transactions that we need to
investigate. Of those thousands of transactions that we
investigate, we end up with a smaller number of Suspicious
Activity Reports that we file.
I have been BSA officer at IBC for 27 years. We do at times
get requests from law enforcement for supplemental information.
There are law enforcement task forces that look at these SARs,
but there is no transparency from FinCEN with regards to this
data.
I have no idea, of the thousands of SARs that we filed at
IBC, how many of those were helpful to law enforcement, what
percentage of those SARs were helpful to law enforcement. And I
believe that FinCEN has a responsibility to give us that
transparency.
We believe in these regulations and we take our corporate
responsibility very seriously, but let's develop rules that
make sense for all of the stakeholders.
Mr. Williams. OK. Again, let's talk about onboarding
process for new costumers.
A 2016 Thomson Reuters survey of companies discussing their
onboarding process with the bank found that 30 percent of the
respondents reported an onboarding time of more than 2 months,
and 10 percent claimed an onboarding time in excess of 4
months.
So if companies that have to wait that long to do business
with yours or a similar institution, they may decide to take
their business elsewhere.
So will the CDD Rule increase onboarding times for new
customers, and are you at risk of losing customers because of
it?
Ms. Martinez. Yes and yes. And so I spoke about that
earlier. Rarely is the beneficial owner the one that walks into
the bank to open the account. It is usually the controlling
person. We are now required to identify the beneficial owners.
The controlling person will not have the identification for
those beneficial owners. So I anticipate that it is going to be
very rare that we are going to be able to open an account when
that individual actually wants the account open.
Even today, sometimes it takes months to collect all the
corporate documents that we need to collect from customers. And
so I think it is a very big danger for our small business
customers.
Mr. Williams. OK. Mr. Greene, as we all know, the May 11
implementation date of CDD Rule is rapidly approaching, as we
have talked. And, however, FinCEN earlier this month released
an additional set of FAQs to assist institutions in compliance.
So do the recent FAQs give institutions the needed clarity
to meet compliance standards, or does FinCEN need to offer
technical corrections or other changes to the regulation?
Mr. Greene. Thank you, Congressman. I think that the FAQs
take care of a number of the questions and concerns that
industry had raised during the 2-year period where they had a
chance to work on implementation to the rule. I do think there
are some questions that are still outstanding, and I think that
that is going to require close collaboration with FinCEN to get
those questions answered, and that FinCEN needs to address
those and provide extra guidance, where needed, so that
institutions can meet their obligations.
I also think that once the May 11 implementation date
arrives and they go forward into implementation, FinCEN needs
to demonstrate some leniency and flexibility with the
inevitable issues that are going to arise as people start to
implement.
Even if they were to resolve tomorrow all the issues that
are raised by the FAQs, there are going to be other issues that
arise as people start to actually implement these rules. And
they just need to be patient and flexible, as Mr. Kalman had
suggested.
Thank you.
Mr. Williams. I yield my time back. I am grateful for
y'all's testimony. Thank you.
Chairman Luetkemeyer. The gentleman's time has expired.
Without objection, the gentleman from New Mexico, Mr.
Pearce; the gentleman from Arkansas, Mr. Hill, are permitted to
participate in today's subcommittee hearing. While not members
of the subcommittee, they are members of the full Financial
Services Committee, and we appreciate their participation
today.
They have just called votes, but I think we can be able to,
hopefully, we get both gentlemen in before we need to leave.
And with that, I will recognize Mr. Pearce from New Mexico,
for 5 minutes.
Mr. Pearce. Thank you all.
And I appreciate your testimony today, Ms. Martinez. You
are at the intersection of what we are struggling with on this
legislation. So let's see if we can lean into the deal here and
we will get to you there.
So you talk in section 1, at the end of it, you talk about
our helping our law-abiding customers achieve financial
success. And believe me, I am on your side in the argument, but
I find myself on the other side of the policy. And so it is
trying to harmonize those two positions.
Because it is exactly that that says that willingness to
help our law-abiding customers achieve financial success. It
says we have to do something on beneficial ownership because it
is my home county where a lot of trucking and the oil field,
and people show up with a lot of money, they buy brand-new
trucks, and they can have new trucks all along and so they
compete better. They don't have to make a profit.
And so what it is doing is actually taking away the
possibility of the law-abiding companies to make a profit
because they can price anywhere they want to. Again, they are
getting free money from drug traffickers somewhere. And so that
drives me.
How do you all evaluate that when you are--I understand the
core value of helping our law-abiding customers achieve
success, but if they can't be successful because the market is
rigged by people who have shell companies, how do you just
think about that particular intersection of the question?
Ms. Martinez. I think it is very important for us to try to
solve the root cause of the problem and not the symptoms.
Mr. Pearce. What is the root cause?
Ms. Martinez. The root cause is that beneficial owners
should be identified at the point of formation.
I agree with Congresswoman Maloney and what she said
earlier, why should the burden be at the bank level only. It
should be at the time that the company is formed. That is the
best time for the identification of beneficial ownership to be
done, and transparency to--
Mr. Pearce. But you understand--I don't mean to interrupt,
but we have a vote coming up. Everybody is trying to get their
questions in.
So you get the beneficial ownership at the time that the
company is formed and then people trade shares. And so they
show up at the bank. And even--if I look down in the second
point, and you are talking about that the control person at the
company may not know who the beneficial owner is. And to me,
that seems like a problem that a bank would want to cure.
If a control person doesn't know who the beneficial owner
is, I think that should send off alarm bells. But you
presented, and again, I am sensitive to your side. Normally I
find myself on your side of the equation. But we are really
struggling because the testimony is that the U.S. has become
the haven for shell corporations because we are so lax in every
regard. And do you feel like the control person should maybe,
maybe, know who the beneficial owner is before they are allowed
to be the control person?
Ms. Martinez. Yes, I do. And I think all of that should be
discussed and entered into record at the time the company is
formed.
Back to the example that I used in Mexico, that is what
happens at the state level when a company is formed. And if
there is a change in ownership, that has to be registered at
the federal level and then it has to be re-registered at the
state level, then we can rely on that information to be
accurate.
Right now, I am basing what a customer is telling me on
their attestation. I have nothing to verify that against.
Mr. Pearce. So your position is based on the fact that
people who are willing to sell drugs and create illicit profits
are going to tell the truth about--
Ms. Martinez. No, I think--
Mr. Pearce. They are going to tell the truth about who the
beneficial owner is when they incorporate or when they--maybe
they just come in to start the bank account and they say--and
they are going to tell you the truth?
Ms. Martinez. I think that--
Mr. Pearce. I don't believe that, but--
Ms. Martinez. I think that is FinCEN's position, which is
why they are allowing for the beneficial ownership at
attestation.
Mr. Pearce. Know that we in the Counterterrorism and
Illicit Finance Act, we have a section--I am going to provide
that to you through the Chairman and all of the people above me
in this organization--and I would like your comments. Because
we are really trying to address the fact that the bankers
submit all these reports and nobody ever gives them feedback. I
think you should actually have access to that information. It
would allow the process to be a little bit more transparent.
I am going to yield back, Mr. Chairman. I will let somebody
else get questions.
Chairman Luetkemeyer. The gentleman yields back.
And then we will go to--
Mr. Pearce. I appreciate you. Thanks.
Chairman Luetkemeyer. With that, we go to the gentleman
from Arkansas. Mr. Hill is recognized for 5 minutes.
Mr. Hill. I thank the Chairman. Thanks for letting me come
to the hearing today.
I appreciate too, Mr. Chairman, you and Mr. Pearce
supporting my effort to delay this rule for 1 year. And I will
tell you why, very, very succinctly.
One, I don't think it helps us catch bad guys. Number two,
we already have a rule in place that, as Ms. Martinez looked
at, is very hard to comply with. And this is made more
difficult. But the principal reason I object is, due to Mr.
Pearce and Mr. Luetkemeyer's hard work, we are trying to
rewrite AML/BSA for the first time in a comprehensive way. And
it seems to me to introduce a new complex beneficial ownership
rule in the midst of trying to get it right statutorily is a
distraction to the banks, in addition to a costly distraction.
So I would like to know, Ms. Martinez, do you support
delaying this rule?
Ms. Martinez. Yes, I do, along with many other bankers.
Mr. Hill. Yes. And so I want to be clear, though, that I
think secretaries of State should have best practices where
they have an active email address, an active phone number, an
active name for an agent, for every incorporation in the
country, absolutely. And that they have some requirement in
their State that there is a penalty associated with being
inaccurate. I think that is good. That is not in our Federal
jurisdiction, but that is an important thing.
And then I would like to argue again in front of this panel
as I have for 2 years now, that we do have accurate beneficial
ownership information in this country, at least once a year,
when we file the tax returns for every one of these pass-
through entities.
And I believe the burden is on the Federal Government and
the Executive branch to work with the Legislative branch to see
how best to use that data because it is accurate. They can
change ownership during the course of the year, no doubt. But
to have a simultaneous knowledge of every time someone changes
ownership in a company in this country, that isn't going to
happen. That is not possible. That is unreasonable.
And so this idea that the IRS has pass-through ownership
down to 0 percent, 25 basis points of a percent. Not 25
percent, it is actually an actual reading of the ownership in
every pass-through entity of someone who has formed a company
and files a tax return in the United States. And that would be
a great safe harbor source of information for our financial
institutions.
Next thing I would say is I am not a big fan for this
data--another infinite database controlled by some unknown
entity that people just ping into and find out what the
beneficial ownership is. We have enough trouble with keeping
people's private, personal information safe in this country.
The IRS has failed doing it. OPM has failed doing it. Equifax
can't do it. Facebook can't do it.
So to create another database that people can ping into
from remote access on a PC or a bank data processing system, I
think bears a lot of risk.
So, Mr. Chairman, I appreciate the work you are doing and
that Mr. Pearce is doing. We need to design a beneficial
ownership rule and customer disclosure capability that banks
can easily comply with, provide the Federal Government the
information they need. But I argue passionately, the Federal
Government has the information we are looking for. Let's find a
legal, constitutional way for that information to be shared
inside the Federal Government.
Thank you, Mr. Chairman. I yield back.
Chairman Luetkemeyer. I thank the gentleman from Arkansas
for yielding back, and I appreciate his patience and his
suggestion. I wholeheartedly agree with it.
I want to thank the panel for your participation. It has
been very enlightening. And you guys have done a great job of
explaining your concerns and your interpretation of the rule
and the consequences of it.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
With that, this hearing is adjourned.
[Whereupon, at 10:52 a.m., the subcommittee was adjourned.]
A P P E N D I X
April 27, 2018
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