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These banking rules may not be doing their job on national security

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One look at the headlines, and it is easy to see that the Trump administration’s deregulation efforts continue to shift into high gear. The nation’s largest banks are taking notice, and with the publication of a comprehensive report in late February, have added the anti-money laundering (AML) and countering the financing of terrorism (CFT) regulatory framework into the discussion.

The Clearing House (TCH) is a trade group of the nation’s largest banks. In recently published report, the group lays out a detailed list of seven “areas for immediate reform” and eight “areas of reform requiring further study” that would radically change the AML and CFT regulatory framework as we know it today.

{mosads}The new administration has made the scaling back of numerous areas of regulation an integral part of their plans. However, the AML and CFT regulations are, by definition, in place as tools for another integral part of the administration’s plans: fighting narcotics trafficking and global terrorism. In fact, the administration’s continued hardline stance on these issues suggest that little, if any, changes in the AML and CFT regulatory framework should be expected.


So should the proposals outlined in TCH’s report simply be ignored? Or can some of them be viewed as “refocusing” regulatory efforts that will actually enhance the weapons used to wage war on terror and narcotics trafficking?

Some of the seven “areas of immediate reform” are unlikely to gain traction for various reasons, despite their potential value. In fact, five of them focus on interrelated issues relative to how banks monitor, report, and share information about potential suspicious activity, including legal certainty regarding the use and disclosure of reports with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The likelihood of the remaining two areas being implemented will involve politics much more than the others.

Rationalize the supervision of multinational financial institutions

The Clearing House advocates that FinCEN should reclaim supervisory responsibility over large, multinational financial institutions that it delegated to the federal banking regulators over 20 years ago. The low likelihood of this happening is best highlighted in the report discussing an original driver of FinCEN’s delegation: “The agency had few resources, and insufficient knowledge of the banking system…” and when provided with “…the choice between supervising 10,000 banks or none, it logically chose none.”

While the report calls on FinCEN to “…assemble sufficient staff to conduct rigorous Bank Secrecy Act examinations…” the likelihood of FinCEN taking ownership of such a regulatory “hot-topic” is minimal. In fact, one could argue that the large TCH banks advocating a singular separate regulator will do little to solve the regulatory burden of the broader industry. In fact, opponents of this specific proposal would likely paint it with the same Wall Street versus Main Street brush that is the center of the Dodd-Frank debate.

Enact beneficial ownership legislation

Conversely, the TCH’s proposal for Congress to prevent the 50 U.S. states to permit “shell companies” being formed without the declaration of “beneficial ownership,” alters the political landscape around the issue. The concept of prohibiting “shell companies” from conducting financial transactions has been discussed for years. Law enforcement and the intelligence communities have been strong advocates to further their respective missions.

FinCEN published its own final rule on the subject — commonly referred to as the “fifth pillar” of AML compliance — in 2016, which, among other things requires covered financial institutions to identify beneficial owners of legal entities that are their customers. That requirement is in direct contravention of individual U.S. states allowing ”shell corporations” to be formed without a “beneficial ownership” declaration. The reason boils down to what it often does: money. State government revenues derived from “shell company” incorporation is significant, and cash-starved state governments have loudly opposed any changes as they seek to protect those revenues.

However, given the clout in Washington of the nation’s largest banks that comprise the TCH, the odds of such a change greatly improve, despite state objections. With FinCEN having declared documenting beneficial ownership of companies as the “fifth pillar” of AML programs, the states will have a hard time justifying in the public arena the allowance of formation of corporations without such information, regardless of revenues state governments receive, particularly if the issue is framed in the political arena as a weapon used to wage war on terror and narcotics trafficking.

There seems to be a consensus among financial institutions that the current AML and CFT regulations and requirements have resulted in such a wide and costly net being cast, that the value to law enforcement and intelligence agencies has been diminished. Whether the TCH proposals can streamline the framework, or even be implemented, remains to be seen. The objective should be a balance of the burden of these regulations against their potential impact on the global war on terrorism and national security.

Adam Ingles is a director and head of regulatory risk solutions at MBAF, a global accounting and advisory firm. He has advised financial institutions on regulatory compliance and enforcement actions for more than 15 years.

The views expressed by contributors are their own and are not the views of The Hill.

Tags Banking Finance National security Regulation White House

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