A few commenters noted that we did not account for the costs associated with designing and conducting training of employees on the new obligations in the CDD rule (as distinct from the cost to financial institutions of employees' time spent in training, for which we did account in the RIA). As described in the sections above pertaining to banks, securities broker-dealers, and mutual funds, we believe that this change better articulates current practice and, therefore, the nature of the obligationthat is, when futures firms detect information relevant to assessing the risk of a customer relationship during the course of their normal monitoring, they then would be expected to update customer information. As for the general comment that the approach we took in the RIA was too academic, we note first that OMB guidance recommends that an RIA should be based on the best reasonably obtainable . Other commenters opposed the notion of a safe harbor, contending that the Certification Form should serve as the Start Printed Page 29407starting point for financial institutions' risk-based due diligence into a legal entity's beneficial ownership. (i) Additional time at account opening. Savings and loan holding companies are excluded for the same reason. 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. As such, we would not expect there to be any significant changes to current practice that is consistent with existing expectations and requirements, and certainly not in the form of inappropriate profiling. We cannot quantify how much the benefit from the final rule would be reduced by this higher threshold for disclosure but are confident that with this threshold illicit actors would have greater ease in using legal entities to mask their financial activities than with the proposed threshold. CDD procedures must contain required elements of a community bank's customer identification program (CIP). But this rule is not a tax. Rather, FinCEN expects covered financial institutions to rely upon the representations of such customers, absent knowledge to the contrary. To understand the types of transactions in which a particular customer would normally be expected to engage necessarily requires the futures commission merchant or introducing broker to have an understanding of the nature and purpose of the customer relationship, which informs the baseline against which aberrant, suspicious transactions are identified. Sorted by: 2. As with CIP, covered financial institutions are not required to maintain these copies or reproductions, but only a description of any document upon which the financial institution relied to verify the identity of the beneficial owner. Incremental Costs to U.S. Criminal Investigations and the Justice System, ii. As described at greater length above and below, FinCEN views the fifth pillar as nothing more than an explicit codification of existing expectations; as these expectations should already be taken into account in a bank's internal controls, FinCEN would expect the confusion caused by this codification, if any, to be minimal. Other commenters noted that the address fields as laid out in the proposed Certification Form, along with the description of the address requirement in the general instructions section, were not congruent with CIP's address requirements, and accordingly asked FinCEN to confirm that the CIP rules' address requirements remained applicable. 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. Some pointed out the potential confusion between two statements in the NPRM discussing the distinction between verifying the identity of the beneficial owner and verifying the status. Several trade association commenters identified a variety of sources of costs that were not widely applicable to the institutions they represented. However, many commenters requested that the proposed Certification Form be permissive rather than mandatory, and that financial institutions be permitted to obtain the information through their standard account opening process without utilizing the Certification Form. Given the uncertainty regarding how financial institutions would adjust compliance officer staffing in response to the final CDD rule, we do not quantify this cost. 125. Economists consider the presence of a market failure to be a justification for policy intervention. [138] As a result, in its certification FinCEN estimated that it would require, on average, 20 minutes to fulfill the beneficial ownership identification, verification and recordkeeping requirements in the proposal. Based on opening 471 new accounts for legal entities and an average wage of $16.77 for new account clerks, this would result in an annual cost to a small bank of $2,550 to $5,100. In 2011, Federal prosecutors indicted 13 individuals for their alleged unlawful takeover and looting of a publicly-held mortgage company. Typically, the institution's Beneficial Ownership form includes a complete list of every legal entity type identified in the CDD Rule, both included and exempt. The beneficial ownership requirement will address this weakness and provide information that will assist law enforcement in financial investigations, help prevent evasion of targeted financial sanctions, improve the ability of financial institutions to assess risk, facilitate tax compliance, and advance U.S. compliance with international standards and commitments. [132] External costs are those that are involuntarily imposed on one individual (the victim) by another individual (the offender). As proposed, a covered financial institution would satisfy this requirement at the time a new account is opened by obtaining information on a standard certification form directly from the individual opening the new account on behalf of the legal entity customer, and by verifying the identity of the natural person(s) identified consistent with existing customer identification program (CIP) procedures for verifying the identity of customers who are natural persons. 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). The rules contain explicit customer due diligence requirements and include a new requirement to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions. Most bank commenters did not raise objections to the concept of a customer risk profile. in Cyprus and the United States. 147. As noted above, a primary reason that FinCEN proposed the Form was to balance the benefits and burdens of this new requirement to the financial institution and its customers with the benefits to law enforcement and regulatory authorities. Two years prior to that, in March 2010, FinCEN, along with several other agencies, published Joint Guidance on Obtaining and Retaining Beneficial Ownership Information, FIN-2010-G001 (March 5, 2010). Many commenters raised questions about what entities and other businesses would be covered and requested that the proposed definition be clarified, particularly the meaning of other similar business entity. Some commenters urged us to include other business forms, such as unincorporated associations and sole proprietorships, within the definition of legal entity customer. If there is the possibility of a cash refund on the account activity identified in paragraphs (h)(1)(ii) through (iv), then beneficial ownership of the legal entity customer must be identified and verified by the financial institution as required by this section, either at the time of initial remittance, or at the time such refund occurs. FinCEN has the legal authority for this action in the Bank Secrecy Act (BSA), which authorizes FinCEN to impose AML program requirements on all financial institutions[1] The cost used in the breakeven analysis includes an order-of-magnitude assessment of information technology (IT) upgrade costs, identified by financial institutions during the comment period and our subsequent outreach as the most substantial driver of implementation costs. FinCEN expects that such flexibility will facilitate the implementation of the beneficial ownership requirementsome commenters noted that giving financial institutions flexibility in integrating this requirement would substantially reduce resource outlays to change customer onboarding processes and to train front-line employees. The BSA is codified at 12 U.S.C. 178. (f) Covered financial institution. Collectively, these elements comprise the minimum standard of CDD, which FinCEN believes is fundamental to an effective AML program. We did not receive any substantive comment on the IT cost during the comment period. 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. The information was provided by the NCUA as of June 30, 2015. Additional information that FinCEN obtained relevant to its estimate of costs is included in the discussion below. corresponding official PDF file on govinfo.gov. This site displays a prototype of a Web 2.0 version of the daily Table 8 shows the number of prison sentences during 2010-14 for categories of crime where the availability of beneficial ownership information could have aided in prosecution. We also noted that all account relationships would be subject to this requirement merely to reflect the fact that all accounts must necessarily be monitored in some form in order to comply with existing SAR requirements, and not only those subject to the CIP rule. At a minimum the record must include: (i) For identification, any identifying information obtained by the covered Start Printed Page 29453financial institution pursuant to paragraph (b) of this section, including without limitation the certification (if obtained); and. . Sources: U.S. Department of Justice, Assets Forfeiture Program. We further noted that, depending on the facts and circumstances, other relevant facts could include basic information about the customer, such as annual income, net worth, domicile, or principal occupation or business, as well as, in the case of longstanding customers, the customer's history of activity. Under the CIP rules, a financial institution's CIP must include procedures for responding to circumstances in which the financial institution cannot form a reasonable belief that it knows the true identity of a customer. The authority citation for part 1020 continues to read as follows: A financial institution regulated by a Federal functional regulator that is not subject to the regulations of a self-regulatory organization shall be deemed to satisfy the requirements of 31 U.S.C. 48. A covered financial institution may also identify additional individuals as part of its customer due diligence if it deems appropriate on the basis of risk. By compelling universal compliance across all covered institutions, implementation of the final rule would increase beneficial ownership disclosure at financial institutions, making illicit activities more costly to commit. [155] 44. These estimates pertain only to the training costs directly associated with the final rule, not the full set of training activities needed to address the broader set of AML/CFT regulations for financial institutions. establishing the XML-based Federal Register as an ACFR-sanctioned In its certification FinCEN noted that financial institutions periodically update their IT systems, and that small financial institutions typically outsource their IT requirements to vendors, which would incorporate the required modifications into the programs that they supply to small financial institutions at minimal additional cost. Requiring covered financial institutions to operate under one clear CDD framework will promote a more level playing field across and within financial sectors. 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. The new information would result in some SARs not being filed that formerly would have been. regulatory information on FederalRegister.gov with the objective of to collect, and to maintain records of, the information used to identify and verify the identity of the names of the beneficial owners[186] This could occur, for example, where a 25 percent or greater ownership interest is held by an entity excluded from the legal entity customer definition under paragraph (e)(2) or by a trust. 2013 FDIC National Survey of Unbanked and Underbanked Households. We would consider any increase in assets recovered due to the final rule as transfers. We offer an order-of-magnitude assessment in the qualitative cost section and carry that analysis into the breakeven analysis. Titus, Richard, Fred Heinzelmann, and John Boyle. A few commenters raised objections to the ongoing monitoring element in the proposal, contending that, as articulated, it was inconsistent with current requirements or expectations regarding the monitoring of customers and transactions and appeared to impose a new requirement to monitor, maintain, and update customer information on a continuous basis. By compelling financial institutions to retrieve beneficial ownership information, the CDD rule's intent is to increase investment in AML/CFT measures to a level that results in higher overall wellbeing (even once costs to financial institutions are netted out). [164165] Given the assumed path of illicit activity during 2016-2025, percent reductions in illicit proceeds in each year equal to those in Figure 1 would yield a stream of benefits having present values equal to the present value of costs. As proposed, this paragraph delineated in broad terms the scope of the beneficial ownership obligationi.e., that covered financial institutions are required to establish and maintain written procedures reasonably designed to identify and verify the identities of beneficial owners of legal entity customers. A Summary of the Significant Issues Raised by the Public Comments in Response to the IRFA, a Summary of the Assessment of the Agency of Such Issues, and a Statement of Any Changes Made in the Proposed Rule as a Result of Such Comments, 3. The report suggests that the ease of concealment plays a primary role in the execution of many financial crimes. Improving a Financial Institution's Ability To Assess and Mitigate Risk, 5. The estimated cost is based on the bank-reported 471 new accounts per year, additional time at account opening of 15 to 30 minutes, and the average wage of $16.77 for the financial industry new account clerks reported by the Bureau of Labor Statistics. 2015. Finally, we assume that staff turnover rates are consistent with the rates provided in the Finance and Insurance sector in the BLS Start Printed Page 29436Job Openings and Turnover Survey. Finally, changing external factors such as evolving AML/CFT policies of foreign governments and management practices of overseas financial institutions may affect the level of illicit activities in the United States, including through cross-border institutions. and that it would be inconsistent to impose a more burdensome requirement in the case of correspondent accounts for foreign banks (and arguably other foreign financial institutions) that are not subject to enhanced due diligence. United States: Publication of Financial Sector Assessment Program DocumentationTechnical Note on Anti-Money Laundering/Combating the Financing of Terrorism. A few commenters requested that we narrow or eliminate the control prong, contending that it would be difficult to identify a control person under such a wide-ranging definition. Second, we apply the BLS 2012-22 projected employment growth rate of 0.9 percent per year for Financial Activities to our 10-year time horizon. See 31 CFR 1010.100(e). Were FinCEN to exempt institutions below a certain size from the rule, those seeking access to the financial system to perpetrate crime would have an easier path in order to pursue such activities. We estimate that 10-year quantifiable costs range from $1.15 billion to $2.15 billion in present value using a seven-percent discount rate and from $1.3 billion to $2.5 billion using a three-percent discount rate. Accordingly, the breadth of the definition will facilitate, rather than hinder, financial institutions' ability to collect this informationbecause legal entity customers are required to provide information on only one control person who satisfies the definition, legal entities should be able to readily identify at least one natural person within their management structure who has significant management responsibility, consistent with the multiple examples of positions provided. The authority citation for part 1024 continues to read as follows: (a) Effective July 24, 2002, each mutual fund shall develop and implement a written anti-money laundering program reasonably designed to prevent the mutual fund from being used for money laundering or the financing of terrorist activities and to achieve and monitor compliance with the applicable requirements of the Bank Secrecy Act (31 U.S.C. 73. The low-cost estimates assume one-third of employees are trained, the initial training takes 30 minutes, and the annual refresher trainings run 10 minutes. The final rules states that ongoing monitoring is conducted to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. 59. They thought, for example, that FinCEN should consider requiring the collection and verification of this information by states at the time of company formation, or that such information should be collected by the IRS through the tax Start Printed Page 29431filing system. [22] DOJ institutions: The Asset Forfeiture and Money Laundering Section of the Criminal Division; Bureau of Alcohol, Tobacco, Firearms, and Explosives; Drug Enforcement Administration; Federal Bureau of Investigation; U.S. http://www.bls.gov/opub/mlr/2013/article/industry-employment-and-output-projections-to-2022.html. Adoption of the final rule would reduce law enforcement agencies' search costs because the information would be collected by covered financial institutions for new legal entity accounts and become more readily accessible to law enforcement agency investigators with a subpoena. Currently, the Federal Bureau of Prisons operates or manages 141 institutions in the United States and the inmate population totals approximately 194,000. [124] 30. 97. We use an estimate of 8 million new accounts per year, which takes into account all financial accounts that will be excluded or exempted from the rule. Anti-money laundering program requirements for brokers or dealers in securities. Alternative 4: Collection and verification of the identities of beneficial owners by State officials at the time of company formation. A covered financial institution must retain the records made under paragraph (i)(1)(i) of this section for five years after the date the account is closed, and the records made under paragraph (i)(1)(ii) of this section for five years after the record is made. 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. Commenters asked that FinCEN clarify or define what constitutes a customer risk profile, noting that the term is not commonly used in the securities industry. Implementing the CDD rule would advance compliance by the United States with the FATF CDD standards and fulfill outstanding public commitments. Financial institutions would primarily satisfy the final CDD rule's requirement to collect beneficial ownership and control information during the legal entity account opening process. 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. However, we first address certain general comments. Compliance with FinCEN's new customer due diligence rule can present significant difficulties for financial institutions that do business with SPVs in structured finance transactions. This commenter proposed that in the case of such accounts, only the lawyers and law firms establishing these accounts would be deemed legal entity customers from which beneficial ownership information would be collected. 69. See Becker, Gary, Crime and Punishment: an Economic Analysis. Journal of Political Economy 78 (1968). One-third of National Bankers' Associations respondents agreed that the beneficial disclosure rule could lead to an increase in capital outflow from the national banking sector (p. 215). [91] The annualized quantified costs (under high cost scenarios) are estimated to be $287 million (at a seven percent discount rate) and $282 million (at a three percent discount rate). In the final rule the institution may obtain the information either by using the Certification Form or by any other means that it obtains information from the customer. Numerous commenters urged FinCEN to broaden the proposed exemptions for regulated financial institutions and publicly traded companies in the United States to include their counterparts outside of the United States.
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