US shell-company registry might not halt dirty money, experts warn

Observers raise questions over verifying beneficial owner info on proposed FinCEN database


A key plank of US anti-money laundering law, which calls for the US Treasury’s financial intelligence unit to set up a centralised registry of corporations, may have limited effectiveness in combatting financial crime, banking experts say.

The registry is part of the US government’s recent push to overhaul its rules on money laundering, amid widespread acceptance that the country’s financial crime laws lag other countries, especially in collecting beneficial ownership data.

While a registry should, in theory, make it easier for banks and law enforcement to identify sources of criminal money, some question whether the information will be sufficient for banks to detect illicit activity within shell companies.

Under the proposed rules, banks would be able to compare new customer applications with data on the registry. But the head of financial crime at a large US bank says that, as the customer has yet to make any appropriation of new funds, the bank has little data to cross-reference.

“It’s not necessarily very effective in the problem of dealing with shell companies in money laundering … because there’s no way the bank can verify the information,” the head says.

The rules would require companies to submit information to the Financial Crimes Enforcement Network, such as names and addresses of each beneficial owner and company applicant. In addition, FinCEN would be required to keep the information in a non-public database, and share it with law enforcement agencies and financial institutions if requested. The rules also direct FinCEN to revise customer due-diligence requirements to account for the fact that banks will be able to access beneficial ownership information directly via the database.

It’s not necessarily very effective in the problem of dealing with shell companies in money laundering … because there’s no way the bank can verify the information

Head of financial crime at a large US bank

The proposals are the next stage in the legislative process for the Corporate Transparency Act, part of the Anti-Money Laundering Act of 2020. The package of measures aims to bring the US more in line with jurisdictions such as the European Union, which has given the go-ahead for a pan-European anti-money laundering agency. The UK also collects and publishes beneficial ownership data via Companies House, a government agency.

“The Corporate Transparency Act and FinCEN’s beneficial ownership reporting proposal are meant to close a gap in our incorporation regime, which has led to the creation of anonymous shell companies that are used to conduct illicit activities like money laundering, terrorist financing, drug and human trafficking,” says Angelena Bradfield, an AML executive with the Bank Policy Institute, an industry lobbying group.

However, numerous procedural issues need to be ironed out before the system can be put into operation, not the least of which is how FinCEN will go about verifying the information that’s reported to it. Would-be criminals are often able to create false documents such as business licences, which has made it difficult for banks to carry out their customer due-diligence requirements.

“We open thousands of accounts every day. If you’re a small business and you identify yourself as a beneficial owner, there are credit checks performed, but not a lot of due diligence,” says the financial crime executive at the US bank.

Another concern is whether FinCEN has the resources to investigate discrepancies that banks may raise. Currently, only a small percentage of suspicious activity reports (SARs) filed with law enforcement agencies are investigated, and banks are frequently not advised as to their status.

The new rules would also require a bank to obtain a company’s permission before it can request information from FinCEN. This measure is designed to alleviate data privacy concerns – a key issue for US authorities following the leak of thousands of SARs from FinCEN in 2020. However, there are questions over whether FinCEN will permit banks to rely on the registry data to satisfy their due-diligence obligations. Otherwise, they would be in a position of having to cross-check the beneficial ownership information they collect with the information in the FinCEN database and resolve any discrepancies.

“Will that end up being more work for financial institutions or is FinCEN building into their database an easy way for financial institutions to get that access?” says Justina Rousseau, head of the financial crimes practice for the Americas at Promontory Financial Group.

FinCEN said in its proposal that it will address these questions in future rulemakings. In the meantime, banks will have to consider what changes they may need to make to their AML systems and procedures. FinCEN has previously allowed banks to design AML-detection programmes tailored to their own risk profiles, as well as those communicated by authorities in the form of national priorities.

“We’re still waiting on final regulations,” says Rousseau. “Hopefully we’ll get those by the end of this year as it relates to the Corporate Transparency Act and all the other pieces of the AML Act.”

Until those regulations are passed, Rousseau says there’s a “grey area” as to the extent that FinCEN intends to share beneficial ownership information with financial institutions.

FinCEN released its proposed rulemaking in December, and it is open for public consultation until Monday, February 7.

Editing by Alex Krohn

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