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Senate Banking Committee Hearing on Beneficial Ownership

Senate Banking Committee 

“Combating Illicit Financing By Anonymous Shell Companies Through the Collection of Beneficial Ownership Information”

Tuesday, May 21, 2019

Key Takeaways

  • Creating a Beneficial Ownership Regime: When asked what a beneficial ownership regime should look like, Blanco explained that it should be “simple” and “concise,” mirroring what the customer due diligence (CDD) rule does. He continued that the information should be collected in one place, giving law enforcement a “one-stop shop” that is appropriately protected, a mechanism for who should be looking at the information, and punishments in place. The witnesses agreed that there should be a centralized source at the incorporation stage where the information can be accessed and verified to make the process less time-consuming, as there are currently over 54 different states and territories that law enforcement must go through for corporate information. They also agreed with the suggestion that FinCEN house the database and that such a regime would be an investment in national security.
  • Potential Burdens: Sen. Pat Toomey (R-Pa.) voiced his concern about the potential burden that would be placed on “innocent parties,” as the “vast majority of shell corporations in America are totally legal,” noting the need to find a balance between the burden placed and the benefits to law enforcement.
  • Trade-Based Money Laundering (TBML): D’Antuono explained that TBML is a “huge issue” that has “time intense” and “resource draining” investigations, adding that shell companies are used “tremendously” in this space. He continued that he has discussions about TBML “all the time” and that the FBI and global counterparts are combating the issue around the world.

Witnesses

  • Kenneth A. Blanco, Director, Financial Crimes Enforcement Network (FinCEN), U.S. Department of Treasury
  • Steven D’Antuono, Section Chief, Financial Crimes Section, Federal Bureau of Investigation (FBI)
  • Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy, Office of the Comptroller of the Currency, U.S. Department of the Treasury

Opening Remarks

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

In his opening statement, Crapo stressed the importance of deterring money laundering and terrorism through shell companies to disguise the true beneficial ownership, noting that the hearing is the first of two on this issue and the second will focus on industry perspectives. He applauded the work of FinCEN with its customer due diligence (CDD) rule that went into effect last year and its engagement with the industry and stakeholders to issue the rule. Crapo noted that the rule only has collection requirements for beneficial ownership information for certain financial institutions, and that the information received helps law enforcement but does not reach the general population.

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Brown noted that subpoenas cannot get to suspicious activity reports (SARs) that are not filed and that compliance officials have observed patterns showing that lucrative clients are not subjected to SAR filings. He continued that there needs to be a requirement for companies to provide basic beneficial ownership information, as terrorists use layers of shell companies to hide information and by the time law enforcement can subpoena to see behind the shell company, the criminal is “long gone.” He stressed the need to move forward with requiring beneficial ownership information without burdening small businesses, as well as the creation of a protected database under FinCEN that is accessible to law enforcement.

Witnesses

Kenneth A. Blanco, Director, FinCEN, U.S. Department of Treasury

In his testimony, Blanco noted that if beneficial ownership information was available to law enforcement, it would be harder and more expensive to hide illicit activities and could prevent crimes from happening. He continued that it takes law enforcement undertaking a time- and resource-consuming process in determining the owner of a shell company. Blanco stressed the need for law enforcement to work with global partners to build cases, especially in the case of actors overseas targeting U.S. people or our financial system, and how important it is for foreign partners to receive information quickly so criminals can be arrested immediately. He continued that due to the long process with “hoops and twists” in identifying beneficial ownership information in the U.S., global partners are “usually dissuaded from working with us,” adding that the U.S. is at risk of becoming a safe haven for bad actors hiding their assets as our allies collect beneficial ownership information.

Steven D’Antuono, Section Chief, Financial Crimes Section, FBI

In his testimony, D’Antuono explained how the lack of a beneficial ownership law is a “major vulnerability,” as foreign partners have addressed the issue in their countries but the U.S. “continues to attract criminals.” He noted that the burden is placed on banks to verify information they are provided, but there is nothing stopping a company from going to a different bank and providing different ownership information. D’Antuono explained that the FBI is often asked by foreign partners if it can provide information on a certain U.S. company, but that ownership information is “obscured.” He noted that the EU requires member companies to provide beneficial ownership information by 2021, and that the UK has had a beneficial ownership law in place since 2016, with a new corporate registry coming in 2021. D’Antuono stressed that protecting the U.S. financial system is one of the top priorities at the FBI, adding that beneficial ownership information will help at home and abroad.

Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy, Office of the Comptroller of the Currency, U.S. Department of the Treasury

In her testimony, Gardineer voiced her support for legislative action to improve the beneficial ownership regime, particularly for creating a consistent nationwide requirement that legal entities update active beneficial ownership information, as well as possibly creating a centralized database for maintaining such information. She explained some of the challenges faced by banks that were made known due to reviewing bank compliance examinations, to include the absence of a reliable source that banks can use to independently verify the accuracy of beneficial ownership information provided when a legal entity opens an account, adding that many states do not collect this information so there is not consistency with the information that is captured and maintained. She voiced her support for congressional action to make legal entities have consistent information when companies are registered, making providing information on ownership a condition of having a U.S. bank account, adding that the data should be consistently collected no matter where the legal entity is formed. She also voiced her support for Congress creating a centralized database to house the beneficial ownership information.

Q&A

Creating a Beneficial Ownership Regime

Members on both sides of the aisle noted that the U.S. is behind the EU and UK on beneficial ownership and money laundering rules, noting how much illicit activity takes place in the U.S. because of this. When asked what a beneficial ownership regime should look like, Blanco explained that it should be “simple” and “concise,” mirroring what the CDD does. He continued that the information should be collected in one place, giving law enforcement a “one-stop shop” that is appropriately protected, a mechanism for who should be looking at the information, and punishments in place. The witnesses agreed that there should be a centralized source at the incorporation stage where the information can be accessed and verified to make the process less time-consuming, as there are currently over 54 different states and territories that law enforcement must go through for corporate information. They also agreed with the suggestion that FinCEN house the database and that such a regime would be an investment in national security.

Sen. Pat Toomey (R-Pa.) voiced his concern about the potential burden that would be placed on “innocent parties,” as the “vast majority of shell corporations in America are totally legal,” noting the need to find a balance between the burden placed and the benefits to law enforcement. When asked how FinCEN knows if the information they have is accurate, as the “bad guys” could use an alias to disguise their identity, Blanco replied that it is totally possible they lie, but that at least they would have the contact information for that individual that would help them in any investigation. Blanco added that the information given can be compared with the CDD information at financial institutions, and if they find any information to be incorrect, the bank will file a SAR.

“Politically Exposed Persons”

In response to several questions from Democrats on how “politically exposed persons” are handled, Blanco replied that every financial institution “needs to follow the rules and obligations” of the Bank Secrecy Act (BSA), adding that “it depends on…how well they know [the client],” as “everything is fact-specific.”

Threat to the U.S. Financial System

D’Antuono stressed that money laundering is a “huge issue,” explaining that beneficial ownership goes “hand-in-hand” with money laundering. He continued that often people do not see victims “at the end of the rainbow” but that there certainly are victims. Blanco noted his sensitivity to the upcoming 2020 election and stated that it will be a priority for FinCEN.

Trade-Based Money Laundering (TBML)

Sen. Kyrsten Sinema (D-Ariz.) discussed TBML and how it is “one of the hardest to detect” as there are “unique challenges” in identifying it, asking how a more centralized beneficial ownership information would help improve investigation efforts. D’Antuono replied that TBML is a “huge issue” that has “time intense” and “resource draining” investigations, adding that shell companies are used “tremendously” in this space. He continued that he has discussions about TBML “all the time” and that the FBI and global counterparts are combating the issue around the world.

For more information on this hearing, click here.