November 29, 2017
House Financial Services Subcommittees on Financial Institutions and Consumer Credit and Terrorism and Illicit Finance “Legislative Proposals to Counter Terrorism and Illicit Finance”
Key Topics & Takeaways
- Beneficial Ownership: Several policymakers expressed interest in the proposed requirement to disclose beneficial ownership in the discussion draft of the Countering Terrorism and Illicit Finance Act. Stefanie Ostfeld of the Global Witness explained that the definition of beneficial owner in the discussion draft is not as strong as the definition used in Rep. Carolyn Maloney’s (D-N.Y.) bill, and added that it should be revised to make it easier for law enforcement to access that data. Rep. French Hill (R-Ark.) explained that he is “not a fan” of the “overly broad” definition of beneficial ownership in the discussion draft.
- Information Sharing: Chip Poncy, President and Co-Founder, Financial Integrity Network, argued that cross-border information sharing is essential for the industry to understand risk and be able to connect the dots internationally. He maintained that financial institutions should be allowed to share information with branches and affiliates as in the discussion draft of the legislation. Rep. Ed Royce (R-Calif.) expressed support for the concept of improving information sharing with foreign bank branches to improve enterprise risk management. Yet he stated his desire to limit cross-border information sharing to jurisdictions that are a member of the Financial Action Task Force on Money Laundering (FATF) or a FATF-style regional body, and have “adequate” privacy and data security provisions in place.
- Daniel H. Bley, Executive Vice President and Chief Risk Officer, Webster Bank, on behalf of the Mid-Size Bank Coalition of America
- John J. Byrne, President, Condor Consulting, LLC
- Stefanie Ostfeld, Deputy Head of US Office, Global Witness
- William J. Fox, Managing Director, Global Head of Financial Crimes Compliance, Bank of America, on behalf of The Clearing House
- Chip Poncy, President and Co-Founder, Financial Integrity Network
Rep. Steve Pearce (R-N.M.), Chairman, Subcommittee on Terrorism and Illicit Finance
Pearce emphasized the need to modernize the Bank Secrecy Act (BSA) framework to provide meaningful information to U.S. intelligence and law enforcement authorities, as well as reduce the compliance burden on the private sector. He noted that the influx of currency transaction reports (CTRs) and suspicious activity reports (SARs) required under the current framework “drown out” actionable information by creating “white noise.” He explained that the discussion draft of the Countering Terrorism and Illicit Finance Act aims to address current weaknesses in the BSA, establish anti-money laundering (AML) and counterterrorism priorities, and identify ownership of shell companies, among other things.
Rep. Ed Perlmutter (D-Colo.), Ranking Member, Subcommittee on Terrorism and Illicit Finance
Perlmutter explained the subcommittee’s desire to “make some changes” to modernize the BSA/AML regime to avoid creating routine work that does not help stop the flow of illicit finance.
Maxine Waters (D-Calif.), Ranking Member, Financial Services Committee
Waters cautioned against lifting SAR and CTR reporting thresholds, which she said would undermine law enforcement efforts to detect bad actors. She also suggested making amendments to the discussion draft to address privacy and civil liberty concerns, as well as closing the loop on other vulnerabilities such as within the real estate sector.
Daniel Bley, Executive Vice President and Chief Risk Officer, Webster Bank, on behalf of the Mid-Size Bank Coalition of America
In his testimony, Bley stated that compliance with the BSA regime is the most complicated and costly for mid-size banks. He explained that the members of the Mid-Size Bank Coalition of America collectively invested more than half of a billion dollars in technology to comply with the current regime; and that the high compliance cost is of serious concern to mid-sized banks because they have less scale to spread out those costs. Bley expressed his support for the bill, particularly the revised reporting thresholds, review of efficiency and effectiveness, changes to beneficial ownership information collection, and the enhanced role of the Treasury Department.
Bley testified that increasing the reporting thresholds would reduce SAR filings by 8-10 percent for the industry. He noted that the current thresholds generate false positives over 90 percent of the time, which then require more labor-intensive investigations.
Bley argued that the change to the beneficial ownership information gathering model is “necessary” because the current framework is “suboptimal in many ways.” He argued that the current beneficial ownership reporting regime allows uneven application and creates data integrity risk. Bley maintained that the proposed public sector-led approach (led by the Treasury Department) solves those challenges, as well as improves transparency and consistency.
John Byrne, President, Condor Consulting
Byrne claimed that the current BSA regime is focused on regulatory compliance, rather than providing law enforcement with actionable information needed to deter illicit activities. Byrne recommended improvements to the existing reporting regimes; but he stated that raising thresholds on CTRs and SARs would do little to reduce the regulatory burden on financial institutions and would eliminate a source of valuable financial crime intelligence. Instead, he suggested eliminating all CTRs and requiring financial institutions report suspicious cash activity directly to the Financial Crimes Enforcement Network (FinCEN).
William Fox, Managing Director, Global Head of Financial Crimes Compliance, Bank of America, on behalf of The Clearing House
Fox explained that the SAR regime has not been changed since the 1990s, despite vast changes in technology and international banking since then, and should be modernized. He expressed support for the Treasury Department taking the preeminent role in coordination, examination, and enforcement of the new regime. Fox also highlighted the importance of the private sector receiving direct feedback from law enforcement and regulatory authorities regarding what information provided is useful.
Stefanie Ostfeld, Deputy Head of US Office, Global Witness
Ostfeld argued for improvements to the proposed beneficial ownership information collection regime. She argued that the beneficial ownership provisions need to ensure the right information is collected, made accessible to appropriate stakeholders, and kept up-to-date. She cautioned that the current language favors bank access to beneficial ownership information while severely limiting state and local law enforcements’ access to this data. She maintained that the bill language should be amended to allow civil or administration officials access to it at state and local level, as well as ensure foreign governments can access it both for law enforcement and intelligence purposes. Ostfeld also encouraged introducing an enforcement mechanism to ensure applicants file beneficial ownership information with FinCEN. She also argued that banks should implement the customer due diligence (CDD) rule on time in 2018.
Chip Poncy, President and Co-Founder, Financial Integrity Network
Poncy testified that the strengthened information sharing provisions in the discussion draft would enable investigators to work with industry analysts to better attack illicit financing networks. He emphasized that it would also expand the Treasury Department’s ability to develop and expand initiatives and consultations with industry to stimulate operational pilots. Poncy also expressed support for the “urgent” implementation of the CDD rule while supporting adoption of reforms to how beneficial ownership information is collected.
Question and Answer
Byrne argued that the lack of information gathering on beneficial owners is “more than problematic.” He noted that the Financial Action Task Force on Money Laundering (FATF) is focused on these issues, and stated that adjustments would help ensure corporates are not used as fronts for illegal activities.
Rep. Carolyn Maloney (D-N.Y.) stated her ongoing work on a bill to require disclosure of beneficial ownership, which she noted also has implications for reviews by the Committee on Foreign Investment in the U.S. (CFIUS). Ostfeld explained that the definition of beneficial owner in the discussion draft is not as strong as the definition used in Maloney’s bill, and added that it should be revised to make it easier for law enforcement to access that data.
Rep. French Hill (R-Ark.) explained that he is “not a fan” of the beneficial ownership provisions in the discussion draft. He claimed that the draft more broadly defines “control” but makes it more “murky” to determine, and may be overly broad. He also expressed concern about the various exclusions included in the discussion draft. Poncy acknowledged that delegating some authority to Treasury on these issues is “key,” and explained the tradeoff with defining clearly beneficial ownership that would enable bad actors to structure around that definition to evade the regime.
Customer Due Diligence Rule
While recognizing the utility of customer due diligence data to law enforcement, Bley stated that a public sector-led approach is the most efficient way to gather such data and ensure data integrity.
Fox noted that financial institutions have the authority to share information within the US with care, yet explained that there are constraints in sharing information with other governments. Fox stated that the UK’s Joint Money Laundering Investigations Task Force has worked well.
Poncy argued that cross-border information sharing is essential for the industry to understand risk and be able to connect the dots internationally. He maintained that financial institutions should be allowed to share information with branches and affiliates as in the discussion draft of the legislation. In response to concerns regarding the expansion of information sharing authorities, Poncy argued that financial institutions should be allowed to share information even when they are not sure that the suspicious activity is linked to money laundering or a predicate. He argued that requiring financial institutions to tie information sharing requests to a specific aspect of money laundering would have a “chilling effect” on information sharing.
Rep. Ed Royce (R-Calif.) expressed support for the concept of improving information sharing with foreign bank branches to improve enterprise risk management. Yet he stated his desire to limit cross-border information sharing to jurisdictions that are a member of FATF or a FATF-style regional body, and have “adequate” privacy and data security provisions in place. Fox acknowledged that it is a sensible issue to raise and explained that industry has an interest in ensuring such information is safe and secure even when shared across borders. Poncy cautioned that some members of FATF are not “friendly” to the U.S. and suggested using “reciprocity” and other factors in the information sharing provision, and delegating the development of detailed criteria to Treasury.
Rep. Nydia Velazquez (D-N.Y.) expressed tepid support for the information sharing provision while noting concerns about civil liberties and privacy in overseas jurisdictions.
Increasing Reporting Threshold
Bley explained that increasing the threshold by which financial institutions have to report SARs or CTRs would reduce the regulatory burden. He urged policymakers to view the reporting threshold as part of a holistic solution to improve the efficiency and effectiveness of the AML/BSA regime.
Additional information about this hearing can be accessed here.