The Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. [116] A few commenters asked FinCEN to provide guidance as to how beneficial ownership information should be incorporated into processes for information sharing pursuant to USA PATRIOT Act Section 314(a); one of these commenters asked FinCEN to declare such information per se outside of the scope of Section 314(a). Because of the structural ambiguities in the proposal as articulated above, we have also amended the ongoing monitoring prong for the final rule for mutual funds. 152. This includes depository institutions (12,513), broker-dealers in securities (4,269), futures commission merchants (101), introducing brokers in commodities (1,323), and open-end mutual funds (10,711), each as defined under the BSA. National Money Laundering Risk Assessment. Potential Impact on Clients, Including Access to Banking for the Unbanked, 5. The proceeds generated by this trafficking organization were laundered through numerous shell and shelf[16] McCollister, Kathryn, Michael French, and Hai Fang. 46. . One Year Later: The CDD Final Rule - ACAMS Today 1,349 small brokers or dealers in securities out of a total of 4,269 (comprising 31.5 percent of the total);[173] [32] Institutions from other U.S. Government agencies include: U.S. This calculation uses the $300 billion estimate for annual illicit proceeds generated in the United States on page 2 of U.S. Department of the Treasury. Commenters from the securities, mutual fund, and futures industries strongly supported this approach. Federal Register provide legal notice to the public and judicial notice This added provision is not only consistent with CIP but also appropriate for the final rule, inasmuch as accounts established to enable Start Printed Page 29413employees to participate in retirement plans established under ERISA are of extremely low money laundering risk. This information would speed the identification of complicit individuals by law enforcement agencies. We further noted that financial institutions had the discretion to identify additional beneficial owners as appropriate based on risk. In general, such aggregation would only be appropriate in cases where an individual owns all or substantially all of the legal entity's equity interests. We expect that the above-described costs would be substantial. Finally, while we believe that a significant increase in, for example, the number of prosecutions for money laundering, following the CDD rule's possible adoption would signal its effectiveness in diminishing the level of criminal activity, given the time required to build and prosecute cases, that sort of quantitative assessment would not be possible for several years. . All of the other commenters addressing this issue articulated estimated costs that fell within the range identified in the RIA. The 2006 FATF Mutual Evaluation Report (MER) found that the United States had implemented an AML/CFT system that was broadly consistent with the international standard. In terms of costs, IT upgrades represent the largest of the qualitative costs examined in the RIA. Under the two elements of the definition of beneficial owner described earlier, up to 10 individuals under the ownership element and one individual under the control element. . A covered financial institution may accomplish this either by obtaining a certification in the form of appendix A of this section from the individual opening the account on behalf of the legal entity customer, or by obtaining from the individual the information required by the form by another means, provided the individual certifies, to the best of the individual's knowledge, the accuracy of the information; and. Pupillo, 101-109. We were able, however, to obtain incremental IT cost estimates specific to a few financial institutions during one-on-one calls. FinCEN received 90 comments, mostly from banks, credit unions, securities and futures firms, mutual funds, casinos, and money services businesses. What Can Behavioral Economics Teach Us about Privacy? In Digital Privacy: Theory, Technologies, and Practices, edited by Acquisti, Alessandro, Stefanos Gritzalis, Costas Lambrinoudakis, and Sabrina De Capitani di Vimercati, 363-377. In response, we note that OMB guidance recognizes that [h]armonization of U.S. and international rules may require a strong Federal regulatory role.[102]. This RIA argues, however, that both of the above upper threshold estimates are exceedingly conservative in that they are based on an upper bound for the rule's costs while not incorporating all of its benefits. By revealing more criminals' identities and therefore facilitating the linkage of criminal acts to perpetrators by financial intelligence and law enforcement, the CDD rule would increase the probability of conviction. [18] Estimated first year training costs range from roughly $210 million to $260 million depending on the share of employees trained and the duration of the training sessions. FinCEN maintains that, because these are necessary measures that covered financial institutions must currently take in order to comply with existing requirements to detect and file suspicious activity reports,[184] This assertion is an inaccurate characterization of our approach to IT costs. It is through CDD that financial institutions are able to understand the risks associated with their customers, to monitor accounts more effectively, and to evaluate activity to determine whether it is unusual or suspicious, as required under suspicious activity reporting obligations. 50. See discussion below under Legal entity customer.. 108. Thus, it is possible that a legal entity could have up to five beneficial owners. United States Financial Sector Assessment Program: Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)Technical Note. 31 CFR 1020.220(a)(1); 31 CFR 1023.220(a)(1); 31 CFR 1024.220(a)(1); 31 CFR 1026.220(a)(1). FinCEN has learned that legal entities without an established and verifiable credit history that seek such accounts are generally required to provide a personal guarantee by a natural person whose identity and credit history are verified. there is robust evidence that crime responds to increases in police manpower and to many varieties of police redeployments. See Chalfin, Aaron and Justin McCrary, Criminal Deterrence: A Review of the Literature, forthcoming, Journal of Economic Literature (2016). Button et al. The authority citation for part 1023 continues to read as follows: A broker or dealer in securities shall be deemed to satisfy the requirements of 31 U.S.C. Regarding the financial institutions' capital loss from accounts closing or never being opened, the respective sections of the RIA go into some detail on why these costs would likely be negligible. When such unquantifiable benefits and costs are likely to be important, one should carry out a threshold, or breakeven analysis to evaluate their significance. In the NPRM, FinCEN proposed that covered financial institutions be required to develop customer due diligence procedures that enabled institutions to (1) identify the beneficial owner(s) of legal entity customers by collecting a mandatory certification form provided by the individual opening the account on behalf of the legal entity customer; and (2) verify the identity of the identified beneficial owner(s) according to risk-based procedures that are, at a minimum, identical to the institutions' CIP procedures required for verifying Start Printed Page 29405the identity of customers that are individuals. 5318(h) and its implementing regulations. The cost calculation is based on a weighted average wage of $29.92 for NAICS codes 5221 (Depository Credit Intermediation), 5222 (Nondepository Credit Intermediation), 5223 (Activities Related to Credit Intermediation), and 5231 (Securities and Commodity Contracts Intermediation and Brokerage), reported in the May 2014 Bureau of Labor Statistics National Occupational and Wage Estimates. 68. 86. 18. As we note in the preamble to the final rule, covered financial institutions will generally be allowed to rely upon the representations of the legal entity customer regarding their ownership structure, substantially mitigating what this commenter identified as the principal driver of de-risking.. Such reductions have the potential to yield significant benefits. Source: U.S. Department of Justice. [115], Table 1aQuantified Costs for 7% Discount Rate, We estimate that first-year costs would range from roughly $370 million to $520 million; training costs would be lower in subsequent years. FinCEN received 38 comments on this preliminary assessment; a summary of the comments we received and the final RIA is included in the Regulatory Analysis section of this preamble. As we have noted, both in the proposal and above, one of the animating purposes of this rulemaking is to promote clear and consistent expectations across and within financial sectors, in order to promote a more level playing field when it comes to AML/CFT compliance. What constitutes a suspicious transaction will vary Start Printed Page 29425depending on factors such as the identity of the customer and the nature of the particular transaction.[93] Note that the social costs of crime are not a subset of the external costs. Regulatory deference. 121. See, e.g., Item 12 of Form 10-K and Item 403 of Regulation S-K. 66. FinCEN Issues New Guidance for Complying with the CDD Rule The United States has long been a global leader in establishing and promoting the adoption of international standards for transparency and information exchange to combat cross-border tax evasion and other financial crimes. In the absence of such analysis, and relatedly, the absence of any data on which to perform our own analysis, FinCEN asserts that it is both reasonable and appropriate to look to the academic literature on the economics of crime for a framework for formally thinking about how the CDD rule would potentially affect criminal outcomes. Estimated capital loss is derived based on survey responses. Microeconomic Theory. Pursuant to many of these agreements, the United States has committed to pursuing equivalent levels of reciprocal automatic information exchange with respect to collecting and reporting to the authorities of the FATCA partner jurisdiction information on the U.S. financial accounts of residents of that jurisdiction. FinCEN agrees with the suggestions made by several commenters that the title of the person with significant management responsibility, as well as of the person submitting the Certification Form or supplying the information, should be included and has made these changes to the Form. The final rules are effective July 11, 2016. FinCEN agrees that it would be impracticable for covered financial institutions to implement the beneficial ownership verification requirement with procedures that are identical to the institution's existing CIP rule procedures for individual customers. An insurance company that is regulated by a State1010.230(e)(2)(xii). More information and documentation can be found in our A few commenters raised concerns that the collection of sensitive personal information of beneficial owners would impinge upon their privacy and increase their vulnerability to identity theft. FATF is performing its mutual evaluation of the United States, to be completed in October 2016. [60] Table 6Initital Suspicious Activity Reports (SARs) Filed in the United States by Covered Institutions, [Sums of all reported types of intial SARs]. As discussed more fully in the Section-by-Section Analysis addressing the amendments to the AML program rules, FinCEN does expect financial institutions to update this information based on risk, generally triggered by a financial institution learning through its normal monitoring of facts relevant to assessing the risk posed by the customer. Thus, understanding the nature and purpose of customer relationships encapsulates practices already generally undertaken by securities firms to know and understand their customers. Under the proposed rule, a beneficial owner would include any individual who (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. These include, among others, exclusions for accounts for employee benefit plans (addressed above), additional entities regulated by the United States or States of the United States, foreign governments and agencies, foreign financial institutions, and nonprofits. A general requirement for U.S. financial institutions to obtain beneficial ownership information for AML purposes advances this commitment, and puts the United States in a better position to work with foreign governments to combat offshore tax evasion and other financial crimes. We believe that harmonizing these requirements across financial sectors will strengthen the system as a whole, by further limiting opportunities for inconsistent application of unclear or unexpressed expectations. Rather, we expect futures commission merchants and introducing brokers to utilize the customer risk profile information as necessary or appropriate during the course of complying with their SAR requirementsas we understand is consistent with current practicein order to determine whether a particular transaction is suspicious. We do not attempt to quantify or monetize the magnitude of this potential reputational effect, given the intangible nature of reputational effects, but assess it to be significant. electronic version on GPOs govinfo.gov. In response to the NPRM, FinCEN received 141 comments from financial institutions, trade associations, Federal and State agencies, non-governmental organizations, members of Congress, and other individuals. 164. A bank holding company, as defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. The conclusion of the order-of-magnitude assessment probably would not be materially changed by gathering additional data unless the current data points are outliers. Based on our understanding of the significant changes to processes and systems that will be required to implement this requirement simply on a prospective basis, we believe that retroactive application would be unduly burdensome. While we recognize that our definition does not encapsulate all possible concepts of control, including effective control, we believe that our definition strikes the appropriate balance between including sufficiently senior leadership positions and practicability. For these purposes, customer information shall include information regarding the beneficial owners of legal entity customers (as defined in 1010.230). The CDD Rule has four core requirements. Section 1010.230(d) Beneficial Owner. These procedures should describe: (A) When the institution should not open an account; (B) The terms under which a customer may use an account while the institution attempts to verify the customer's identity; (C) When it should close an account, after attempts to verify a customer's identity have failed; and (D) When it should file a Suspicious Activity Report in accordance with applicable law and regulation. While the requirement to identify the beneficial owners of legal entity customers does not modify this existing CTR aggregation requirement, the beneficial ownership identification may provide financial institutions with information they did not previously have, in order to determine when transactions are by or on behalf of the same person. The term covered financial institution refers to: (i) Banks; (ii) brokers or dealers in securities; (iii) mutual funds; and (iv) futures commission merchants and introducing brokers in commodities. Because the rule will apply to all of these small financial institutions, FinCEN concludes that the rule will apply to a substantial number of small entities. Online Information Privacy: Measuring the Cost-Benefit Trade-Off. ICIS 2002 Proceedings, Paper 1 (2002). Such entities are subject to BSA obligations, which reduces the AML risk of such trusts. 9. For example, if the ownership threshold were reduced to include each individual owning 10 percent or more of the equity interests of a legal entity, a financial institution would potentially have to identify more individuals as beneficial owners, which would result in greater onboarding time and expense in such cases, with commensurately greater available information. 5318(h)(1) if the broker-dealer implements and maintains a written anti-money laundering program approved by senior management that: (a) Complies with the requirements of 1010.610 and 1010.620 of this chapter and any applicable regulation of its Federal functional regulator governing the establishment and implementation of anti-money laundering programs; (1) The establishment and implementation of policies, procedures, and internal controls reasonably designed to achieve compliance with the applicable provisions of the Bank Secrecy Act and the implementing regulations thereunder; (2) Independent testing for compliance to be conducted by the broker-dealer's personnel or by a qualified outside party; (3) Designation of an individual or individuals responsible for implementing and monitoring the operations and internal controls of the program; (4) Ongoing training for appropriate persons; and. IMF Country Report No. To understand the types of transactions in which a particular customer would normally be expected Start Printed Page 29424to engage necessarily requires an understanding of the nature and purpose of the customer relationship, which informs the baseline against which aberrant, suspicious transactions are measured. See also: Hann, Il-Horn; Kai-Lung Hui, Tom Lee, and I Png. We can think of financial institutions that build and maintain their networks in-house as vendors having a single client. For purposes of this paragraph (b)(4)(ii), customer information shall include information regarding the beneficial owners of legal entity customers (as defined in 1010.230 of this chapter). banks effectively serve the broadest possible set of consumers.. Therefore, even though the RIA assumes high IT costs, we find that the final CDD rule would still only need to exhibit a modest level of effectiveness for its benefits to justify its costs as laid out in the RIA. However, because such costs cannot be quantified, they are not included in the RIA. A person described in 1020.315(b)(2) through (5) of this chapter 1010.230(e)(2)(ii), An issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 or that is required to file reports under section 15(d) of that Act[64] As a result of being an economically significant regulatory action, FinCEN prepared and made public a preliminary RIA, along with an Initial Regulatory Flexibility Analysis (IRFA) pursuant to the Regulatory Flexibility Act, discussed below, on December 24, 2015. We understand that much of a mutual fund's understanding of the nature and purpose of a customer relationship arises predominantly from the customer's initial decision to invest in a mutual fund, as reflected largely by the customer's choice of product. We reiterate that the 25 percent threshold is the baseline regulatory benchmark, but that covered financial institutions may establish a lower percentage threshold for beneficial ownership (i.e., one that regards owners of less than 25 percent of equity interests as beneficial owners) based on their own assessment of risk in appropriate circumstances. FinCEN conducted this outreach to gather information for its preliminary RIA of the proposed rule pursuant to Executive Orders 13563 and 12866 as well for the IRFA. Strong CDD practices that include identifying and verifying the identity of the natural persons who own or control a legal entityi.e., the beneficial ownershelp defend against these abuses in a variety of ways. Table 8Sentenced to Prison Term for Federal Crime. Assuming there would typically be two individuals identified as beneficial owners, for purposes of the IRFA FinCEN estimated the additional time to open a legal entity account between a low estimate of an additional 15 minutes and a high estimate of an additional 30 minutes to open a legal entity account. Some commenters stated that with regard to certain specialized credit products, the beneficial ownership requirement would be likely to cause businesses to utilize uncovered competitors. The order-of-magnitude assessment of the IT cost should be understood carefully due to the information deficiencies. http://www.treasury.gov/about/organizational-structure/offices/Pages/The-Executive-Office-for-Asset-Forfeiture.aspx (accessed October 8, 2015). (2) Limitations on Exemptions. In order to compute the benefit of reduced crime from the CDD rule, we would need to know both the causal negative effect of the CDD rule on the level of illicit activity (discussed above) and the costs imposed on society by the illicit activity that would not occur in the presence of the rule. A few commenters sought clarification of the concept of a customer risk profile, as well as of how the nature and purpose of customer relationships were to be understood for customers of broker-dealers. Accordingly, we expect this element to be construed fully consistently with the SAR rule and associated guidance for mutual funds. See, e.g., FinCEN, Summary of Public Hearing: Advance Notice of Proposed Rulemaking on Customer Due Diligence (October 5, 2012), available at http://www.fincen.gov/whatsnew/html/20121130NYC.html. However, we agree with the commenters that this element as presented in the proposal could be construed in this fashion. We use $22.71 per hour, the weighted average hourly wage for all employees from the May 2014 National Occupational Employment and Wage Estimates report. As to the assertion that it was inappropriate to rely upon such a small sample size in developing our cost data, we agree that it might arguably have been preferable to obtain specific, granular data from a large and diverse set of financial institutions. Alternative 5: Collection and verification of the identities of beneficial owners by the Internal Revenue Service (IRS). 23. This argument is not supported by a plain reading of the statutory text. We have considered all commenters' requests for exclusions to the definition and have incorporated only those that we have determined are appropriate in this context. For example, a 10-year stream of $59 million (the High Estimate annualized cost for training in Table 1a) has a present value of $439 million using the seven-percent discount rate. For instance, real illicit proceeds (including from illicit drug sales) are assumed to be $309 billion and almost $383 billion in 2016 and 2025, respectively. FATCA requires foreign financial institutions to identify U.S. account holders, including legal entities with substantial U.S. ownership, and to report certain information about those accounts to the Internal Revenue Service (IRS). Clarifying and strengthening CDD requirements for U.S. financial institutions, including with respect to the identification of beneficial owners, advance the purposes of the BSA by: (1) Enhancing the availability to law enforcement, as well as to the Federal functional regulators and self-regulatory organizations (SROs), of beneficial ownership information about legal entity customers obtained by U.S. financial institutions, which assists law enforcement financial investigations and a variety of regulatory examinations and investigations; (2) Increasing the ability of financial institutions, law enforcement, and the intelligence community to identify the assets and accounts of terrorist organizations, corrupt actors, money launderers, drug kingpins, proliferators of weapons of mass destruction, and other national security threats, which strengthens compliance with sanctions programs designed to undercut financing and support for such persons; (3) Helping financial institutions assess and mitigate risk, and comply with all existing legal requirements, including the BSA and related authorities;Start Printed Page 29400, (4) Facilitating reporting and investigations in support of tax compliance, and advancing commitments made to foreign counterparts in connection with the provisions commonly known as the Foreign Account Tax Compliance Act (FATCA);[11], (5) Promoting consistency in implementing and enforcing CDD regulatory expectations across and within financial sectors; and. OMB Circular A-4, available at https://www.whitehouse.gov/omb/circulars_a004_a-4. FinCEN viewed this part of the rulemaking as not imposing new requirements, but rather making explicit the activities that covered financial institutions are already expected to undertake, based on guidance and supervisory expectations, in order to satisfy their existing obligations to detect and report suspicious activities. The Bank Secrecy Act, among other things, requires financial institutions, including broker-dealers, to develop and implement AML compliance programs. Exemptions from the Ownership Prong Certain legal entity customers are subject only to the control prong of the beneficial ownership requirement, including: A pooled investment vehicle operated or advised by a financial institution not excluded under paragraph 31 CFR 1010.230(e)(2); and With respect to Alternative 5, some commenters also urged that beneficial ownership information could more efficiently be collected by Federal officials at the IRS through the process of obtaining Employer Identification Numbers for legal entities, which would shift the costs from financial institutions to government. Similar to environmental regulations, the CDD rule is meant to correct for a positive spillover that in this case leads to a less-than-efficient level of investment in AML/CFT security measures. Thus, the information that will be provided under FinCEN's regulations will significantly augment information presently available to law enforcement from State authorities, thereby improving the overall investigative, regulatory, and prosecutorial processes. 192. For all of the above reasons and others, this cost-benefit analysis relies extensively on a qualitative assessment of potential effects, based on relevant literature. Furthermore, setting the threshold this high would render the rule more susceptible to evasion, as beneficial owners of legal entities could more easily manage their ownership interests to fall below this level than 25 percent. FinCEN accordingly declines to alter the categorical nature of the requirement for the final rule. According to data obtained from the IRS regarding tax returns, approximately 75 percent of all businesses filing tax returns are sole proprietorships. We believe that such additional explanation is unnecessary. For example: One commenter raised a concern that this obligation would effectively require financial institutions to monitor the equity interests and management team of legal entity customers on an ongoing basis and continually update this information. This is because FinCEN understands that approximately 3,000 small credit unions have five or fewer employees. Beneficial ownership requirements for legal entity customers. These three exemptions are subject to further limitations to mitigate the remaining limited money laundering risks associated with them, as follows: The first limitation reflects the additional structural limitation described in our discussion of these account types that makes them a low risk of money laundering, and therefore a necessary characteristic to qualify for these exclusions.

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