Compliance with proposed regulations from the Financial Crimes Enforcement Network will be necessary for banks to avoid restrictions on growth activities such as M&A.
A new Financial Crimes Enforcement Network (FinCen) proposal — the second of a trio of rulemakings under the Corporate Transparency Act from January 2021 — would establish a nonpublic database with beneficial ownership information. Beneficial ownership tells companies which individuals directly or indirectly control or own a company and is important for identifying and avoiding sanctioned individuals.
The rule seeks to help banks in performing due diligence on customers, which helps to ensure compliance with anti-money laundering (AML) rules. However, banks are not happy with the proposal, claiming it increases their compliance burden for a database that will not be helpful to them. However, if it goes into effect, compliance will be vital to avoid restrictions on growth that result from AML violations.
Big effort, little reward
The banking industry is arguing that the proposed rule will add burdensome compliance requirements while doing little to benefit them because of limited information in the database as well as constraints on access to it.
"The whole objective of this was to try and simplify things for banks and financial institutions that were required to perform customer due diligence," Michael Mann, a partner at Sidley Austin LLP who advises financial institutions on anti-money laundering regulations among other topics, said in an interview. "This doesn't alleviate any of the existing burden that banks and financial institutions were required to undertake."
The American Bankers Association and state banking associations said in a comment letter to FinCEN that "the proposal is fatally flawed and should be withdrawn" because it "creates a framework in which banks' access to the Registry will be so limited that it will effectively be useless, resulting in a dual reporting regime for both banks and small businesses."
As is, the proposed rule limits sharing with branches, subsidiaries, affiliates or home offices outside the US, according to Eric Young, senior managing director at Guidepost Solutions LLC.
Often, when a bank runs into compliance issues related to AML, it is because regulators believe the bank's program was not "enterprise-wide enough," but the FinCEN rule does little to help solve that issue, Young said.
"If a bank cannot benefit from the information or data gathered from this registry to share with their colleagues in other jurisdictions, then again, one, it's duplicative, two, it creates an added burden and cost, and three, it in effect handcuffs the institution with information that it can't even share," Young said.
Further, banks anticipate challenges in incorporating the registry and new compliance requirements with existing mandates.
"A big part of banks' anti-money laundering program is assessing risk and the level of attention they give to a particular customer, and currently there are certain expectations that they collect lots and lots of information beyond what's merely required in the [customer due diligence] rule," Mann said. "Most financial institutions request even more than that because there is that overarching expectation. ... What banks are concerned about is the old standard will continue to exist, except they're going to have this new requirement to check this database," which will likely not be very useful.
Risks of noncompliance
The rule was proposed in December 2022 and the comment period ended Feb. 14. FinCEN spokesperson Candice Basso said the agency anticipates the beneficial ownership registry will be in operation by Jan. 1, 2024, and intends to finalize the rule before that date, but since the comment period just ended in February, "it's difficult to provide a timeline."
Whenever the rule does go into effect, compliance will be crucial if banks want to engage in growth activities such as M&A.
"When you get hit with any type of fine or enforcement or penalty that is directed at your AML program, then all of a sudden everything else can be impacted because your safety and soundness exam then is going to be more focused on the AML element," Camilla Yellets, director of financial crime compliance at LexisNexis Risk Solutions, who formerly worked in anti-money laundering compliance at Fulton Financial Corp., said in an interview. "Your ability to be able to then, perhaps, as an organization, do any type of merger and acquisition is restricted."
Anthony Rapa, a partner who leads the national security team at Blank Rome LLP, agreed, saying compliance with the new FinCEN regulations could surface in regulators' due diligence associated with M&A transactions.
When a bank finds itself in regulatory hot water regarding compliance with matters such as AML, regulators often place either direct or indirect growth restrictions on an institution. In a recent example, USAA Federal Savings Bank ended a decadeslong streak of growth when its total assets shrunk year over year at the end of 2022 after facing a series of regulatory challenges in recent years.
When a bank experiences regulatory issues related to AML, the Bank Secrecy Act, the Community Reinvestment Act or other compliance weaknesses, it is more likely to be precluded from engaging in expansionary activities like M&A or branching, industry advisers told S&P Global Market Intelligence in February.