Testimony of Dalia F. Martinez, Executive Vice President of Operations International Bank of Commerce before the Subcommittee on Financial Institutions and Consumer Credit, April 27, 2018

Dalia F. Martinez, Executive Vice President of Operations, International Bank of Commerce, testified in front of the U.S. House of Representatives Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit on Friday, April 27, 2018 at a hearing regarding the implementation of the Financial Crimes Enforcement Network’s (FinCEN) rule on Customer Due Diligence Requirements for Financial Institutions.

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Testimony of Dalia F. Martinez,
Executive Vice President of Operations, International Bank of Commerce.
On behalf of the Mid-Size Bank Coalition of America before the Subcommittee on Financial Institutions and Consumer Credit,
United States House of Representatives,
April 27, 2018

Chairmen Leutkemeyer and Pearce, Ranking Members Clay and Perimutter and members of the subcommittee, I am honored to have this opportunity to present testimony today regarding FinCEN’s Customer Due Diligence Rule. I am Dalia F. Martinez, Executive Vice President and Corporate Bank Secrecy Act Officer for International Bank of Commerce. IBC Bank–Laredo is a member of International Bancshares Corporation (NASDAQ: IBOC), a $12.2 billion multi-bank financial holding company headquartered in Laredo, Texas, with 192 branches and more than 294 ATMs serving 90 communities in Texas and Oklahoma. I am speaking to you today representing the Mid-size Bank Coalition of America, the voice of 88 community banks with headquarters in 34 States. MBCA banks are primarily between $10 billion and $50 billion in assets with more than 10,000 branches in all 50 states, with deposits of $1.2 trillion. MBCA banks represent, service, and support millions of customers.

I am speaking to you today representing the Mid-size Bank Coalition of America, the voice of 88 community banks with headquarters in 34 States. MBCA banks are primarily between $10 billion and $50 billion in assets with more than 10,000 branches in all 50 states, with deposits of $1.2 trillion. MBCA banks represent, service, and support millions of customers. I have held the position of Bank Secrecy Act Officer at IBC for more than 27 years. Many of our branches are located in High Intensity Drug Trafficking Areas and in High Intensity Financial Crime Areas, BSA compliance is a top priority for us, and I have seen first – hand how BSA regulations have evolved, the burden they have placed on our bank, and how these regulations have sometimes ended up harming, rather than helping, our most important asset, our law-abiding customers. I would like to focus on four points in my testimony today.

First, compliance with the CDD Rule is very expensive and burdensome. IBC has spent 2,912 hours in design and testing, and 7,859 hours in training 2,142 employees and officers preparing to comply with this regulation. These expenditures are on top of the $5 million a year we currently spend to comply with existing BSA/AML regulations (see Attachment A – IBC Organizational Charts). Every hour a bank employee spends on regulatory requirements that are not reasonably tailored to meet the legitimate public policy objectives of the BSA is an hour that the employee is not able to spend on another core value – helping our lawabiding customers achieve financial success.

Second, the CDD rule has many gray areas that are difficult to implement. Let me provide you an example that illustrates this. Bank front line employees, who are typically not schooled in complicated business structures, are required to capture beneficial ownership information when an account is opened, but the individual opening the account on behalf of the company is usually a control person at the company and not the actual business owner. While in some cases the controlling person may have knowledge of the ownership structure of the company, they often will not have the identification required for the beneficial ownership CDD requirement. This may result in accounts being turned away, delays in opening accounts, and exceptions that need to be tracked by the bank. And every time a bank makes an “exception,” it increases the likelihood of having that decision second-guessed later in a regulatory exam. Accordingly, the burden of obtaining the information and the compliance risk presented to the bank when the customer does not have the information readily available increases the likelihood that the bank will just not do business with that customer as part of “de-risking” (see Attachment B – Details on De-Risking).

Third, the rule puts a burden on banks to ensure the information the customer provides is accurate, but banks are not given either the tools or the guidance they need to make that determination. Specifically, under the rule, banks can rely on the information that customers disclose about the ownership structure of the bank customer only so long as the financial institution does not “have knowledge” of facts that would reasonably call into question the reliability of the information. However, FinCEN does not define “having knowledge”. Financial institutions have millions of records. Are we to comb through all our records to ensure information provided on a beneficial ownership attestation does not conflict with a document already contained in the bank’s records? Unlike some countries, the United States does not maintain a national database of business ownership information, or require such information at the time of incorporation, that a financial institution can rely on. Tools and guidance from FinCEN designed to help banks verify customer information are needed (see Attachment C – Mexican Business Requirements and Mexican databases).

Fourth, while FinCEN has provided some guidance to banks in the form of FAQs, the FAQs in some cases are not clear, and in other cases the FAQs create an even greater burden on banks and, ultimately, bank customers. One such example is with Certificates of Deposit (CDs) that auto renew. These CDs are for a specific term and rate. Upon maturity, the CD renews and the customer never has to come to the bank as renewal information is mailed to the customer. FinCEN FAQs state that upon the first auto renewal of a CD established prior to May 11, 2018, the financial institution must obtain the beneficial ownership and CDD information. This means banks will need to contact their customers to try to obtain the beneficial ownership information. From my 39 years in banking, I can tell you customers do not update their phone numbers and email addresses with the bank on any regular basis. Therefore we will most likely have to rely on mail. If the customer does not respond to the bank’s request, tracking exceptions will be required. And again, every time a bank makes an exception, the exception is tracked for BSA exam purposes and is subject to second-guessing after the fact. Again, this reality will lead to even more de-risking, which will harm bank customers, especially small business customers who are not exempt from any of these requirements (see Attachment D – Account Exception Report).

In closing, on behalf of IBC and MBCA, it is important that the committee understand the regulatory burden and costs imposed by these rules – burden and costs that ultimately affect our bank customers. Of course, whether a burden or cost of a regulation is too high depends upon the benefit of the regulation and, unfortunately, other than anecdotal information, there is just too little information about the actual benefit of the countless forms and reports that banks must file. The government does not provide any reports on the benefits being achieved from this massive reporting required by BSA. If you want specific information on what I have seen regarding law enforcement investigations, I am happy to answer these questions and any other questions you may have. Finally, it is critically important that FinCEN provide clear and effective guidance to our prudential regulators and banking compliance professionals like myself, absent this guidance the prudential regulators will be left to their own interpretations and ultimately this will result in customers simply being driven out of the traditional banking system.

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