House AML Bill is a Missed Opportunity

By Gary Kalman

This article was originally published by the American Banker. 

At first look, the banking community should be pleased with a bill scheduled for a vote this week in the House Financial Services Committee. Several provisions aim to reduce the compliance costs of financial institutions when trying to meet the requirements of anti-money-laundering rules.

Yet first looks can be deceiving.

A previous version of the bill, a discussion draft examined by the committee in November, included virtually all of the current provisions, such as incentives for innovation, increased information sharing and feedback from the Financial Crimes Enforcement Network and streamlining of suspicious activity reporting. But one provision missing from the latest draft of the bill is a section to require Fincen to collect beneficial ownership information at the time of corporate formation and share that information with financial institutions and law enforcement. Considering Fincen’s new customer due diligence rule, which requires banks to identify beneficial owners of certain corporate bank accounts, this provision would have reduced compliance costs and potential liability should banks find themselves at odds with their regulators over AML compliance.

A mountain of evidence has documented the use of anonymous companies in money laundering schemes. Drug cartels launder money and fuel the opioid epidemic. Human trafficking operations hide behind anonymous companies. When Iran was seeking to evade economic sanctions, it did not stash money in Russia or China. It used an anonymous company in New York to secretly own property in Manhattan. Unsuspecting tenants paid millions in rent to a shell company that was a front for the Iranian government.

As a result, the original bill — which included the requirement for Fincen to collect and share ownership information — had the backing of the banking community. Financial institutions supported the provision because, with access to the information, it would ease compliance when fulfilling “know your customer” requirements. The provision also had the support of the law enforcement community, including police and prosecutors, the national security community, large businesses concerned about their supply chains, small businesses concerned about shell companies stealing contracts, the real estate sector, conservative and liberal scholars, faith leaders and groups from across the political spectrum focused on fighting corruption. I can’t say for certain, but it may well have been the only bill in congressional history that had support from both Dow Chemical and Friends of the Earth.

The House Financial Services Committee held at least two hearings on money-laundering issues in the past year, and the one reform that every expert witness — Republican and Democrat — agreed was important was to have the government collect beneficial ownership information and share it with those tasked with protecting our financial system from abuse. There were even signs of support from the Trump administration. The Justice Department sent witnesses to Congress on two occasions to voice support for the collection of this information. Fincen itself said this would be a valuable tool.

This week, a new version of the bill was introduced. Same title, different response. In dropping the beneficial ownership provision, the bill has lost the support of law enforcement. The Fraternal Order of Police has said it will not only oppose, but will include this vote on their scorecard when rating legislators on their support for local cops. The National District Attorneys Association is also opposed. National security experts, anti-corruption groups and scholars from across the political divide are speaking up in opposition.

As a result, the bill has lost its bipartisan appeal. A bill that could have been signed into law this year — one that provides law enforcement with powerful new tools and allows banks the flexibility to use better, more efficient ways to meet anti-money-laundering obligations — will not make it through the legislative process.