As the world economy has globalized, so have criminal networks. The IMF and World Bank estimate that money laundering now represents 3-5 percent of global GDP. Of the $2 to $3 trillion that is laundered each year, only $170 million (less than 1 percent) is detected and stopped. One reason is that crime control has been focused locally and is not designed to deal effectively with criminal networks that operate transnationally. As such, anti-money laundering regulations in the US are being evaluated to improve international monitoring, detection and prevention.1
Strengthening US anti-money laundering efforts
August 28 – 30, I listened to experts from regulatory, law enforcement and the financial services industry. They discussed the systems and processes they use for monitoring for money laundering and terrorist financing, as well as the impact that recent and anticipated changes in regulations have or will have on their operations.
During a panel discussion on the New Proposed Rules on Customer Due Diligence, I learned some interesting information about an ANPRM recently issued by the Financial Crimes Enforcement Network (FinCEN).
In the news
On March 5, 2012, FinCEN issued an ANPRM to solicit public comment on strengthening and clarifying customer due diligence (CDD) requirements. In particular, FinCEN is considering an explicit CDD that requires financial institutions to identify beneficial ownership of their accounts. This ANRPM applies to all industries that have anti-money laundering (AML) program requirements under FinCEN’s regulations.
What is in this CDD?
The objective of CDDs is financial transparency – knowing enough about the customer to predict with relative certainty the types of transactions in which the customer is likely to engage. This makes it easier to identify transactions, which are potentially suspicious, and understand the money laundering or terrorist financing risks of the customer. Adequately monitoring for illicit activity can protect the bank from financial loss or reputational risk.
An effective CDD program includes:
- Identifying and verifying the customer. Financial institutions must identify their clients and ascertain relevant information pertinent to doing financial business with them.
- Understanding the nature and purpose of the account. Where is the money coming from, and where is it going? What is the expected activity? This allows the institution to appropriately assess the propensity of risk and monitor for suspicious activity.
- Monitoring the activity. Does it make sense given the profile of the account holder?
- Knowing who is controlling the account? Identify the beneficial owner(s) and verify the beneficial owner(s) identify.
Why the emphasis on beneficial ownership?
Money launderers are trying to conceal the source of illicit funds, so they carry out multiple steps to funnel ill-gotten gains into the world financial systems.
- Placement –Getting money into a legitimate financial institution is the riskiest phase as it involves high-value monetary deposits, which banks must monitor and report.
- Layering –Carrying out complex financial transactions to change the form of the money, and make it difficult to follow. Examples are wire transfers, currency exchanges, high-value asset purchases, and investing in legitimate businesses.
- Integration - Money re-enters the economy through what appears to be legal transactions as the assets obtained through layering are sold.
Money launderers layer their financial transactions, and they also layer corporations to mask their identity. Beneficial ownership can help penetrate the criminals’ shroud of anonymity. While there is investigative value to verifying the identity of the account holder, verifying beneficial ownership provides a fuller understanding of the account and helps follow the money during layering.
Money laundering and terrorism financing are global problems
Following the money increasingly leads law enforcement across borders. Beneficial ownership information improves the United States’ position when working with foreign governments to combat financial crimes.
“Effective anti-money laundering and combating the financing of terrorism regimes are essential to protect the integrity of markets and of the global financial framework as they help mitigate the factors that facilitate financial abuse.”
The Financial Action Task Force (FATF) sets standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the international financial system. The FATF has recommended identifying the beneficial owners of an account and taking reasonable measures to verify their identity. Given that FATF sets the world standard, FinCEN is considering expressly requiring that financial institutions conduct CDD as part of their existing AML programs and collect beneficial ownership information for all customers, with limited exceptions. Today, CDD requirements in the US are implicit.
In the panel discussion, the impact of this potential rule change was discussed. Because current CDD guidelines are implicit, the on-boarding process can vary from one institution to another. Rather than leave the regulations to interpretation, some prefer standardization. In addition to ensuring conformity, a standard process puts all institutions on equal footing from a competitive standpoint. If the guidelines are not consistently enforced today, potential customers may shop for a financial institution with less stringent customer identification requirements.
All parties agree that it is essential to explicitly clarify the expectations so that financial institutions, law enforcement, regulatory agencies and other governing bodies are aligned in their fight against money laundering and terrorist financing. The consultative ANPRM process will allow FinCEN to develop a stronger, clearer and more effective standard in support of FATF efforts to ensure the integrity of the world’s financial system.