The Financial Action Task Force (“FATF”) has re-rated the U.S. as “largely compliant” with FATF’s Recommendation 24, which pertains to transparency related to beneficial ownership of legal persons.  Specifically, FATF released its seventh Enhanced Follow-Up Report (the “Report”) indicating that the improved re-rating was due, in part, to the implementation of the Corporate Transparency Act (“CTA”) as well as the Customer Due Diligence (“CDD”) Rule, which requires covered financial institutions to obtain beneficial ownership information (“BOI”) from designated entity customers opening up accounts.

FATF is an independent, inter-governmental body that develops global policies related to anti-money laundering, terrorist financing, and related crimes. As a member of FATF, the U.S. is subject to evaluations of its technical compliance with the various FATF recommendations. FATF’s lengthy Mutual Evaluation Report for the U.S. (“MER”), issued in December 2016, had identified the U.S. as “deficient” and subject to enhanced follow-up in regards to Recommendation 24.

In a press release, Treasury Secretary Janet Yellen remarked that the re-rating was a result of the past decade of work by the Treasury Department and its interagency partners, and indicated Treasury’s commitment to “strengthening the implementation of the FATF’s global standards.”  As we have blogged, the U.S. has been subject to global criticism for years because it has been perceived as a haven for money laundering and tax evasion.

Despite the progress the U.S. has made in regards to Recommendation 24, the U.S. still has not attained a rating of “compliant.”  The Report asserted that the U.S. and the CTA still present the following deficiencies:

• Not all states have information on, or require a list of, directors or principal officers.
• States do not expressly prohibit a legal entity from using a nominee director. While the CTA and BOI Rule addressed this issue by excluding nominees from the definition of a beneficial owner, this CTA exclusion only applies to covered reporting companies and the deficiency has not been fully addressed.

The Report also highlighted the following continuing deficiencies related to the CDD Rule:

• The Rule allows a reporting entity to provide a residential or business street address of a next of kin or another contact individual when a beneficial owner’s residential or business address is not available. FATF states that this allowance presents room for “abuse.”
• Covered financial institutions are only required to update BOI on a risk basis and not on a periodic basis. FATF’s preference is to require updates on both a risk and a periodic basis.
• Although the CDD and BOI Rules require financial institutions and FinCEN to maintain reported BOI information for at least five years, there is no explicit obligation for reporting legal entities to maintain their BOI for at least five years.  FATF notes that this could lead to an “asymmetry” with information available through FIs and FinCEN. 

As a reminder, the CTA requires FinCEN to amend the CDD Rule to account for the BOI reporting and access rules. A proposed rulemaking regarding the CDD rule is expected sometime this summer. Given Treasury’s commitment to implementing FATF standards, we may see the deficiencies related to the CDD Rule addressed in the proposed rulemaking.

Finally, the Report only addressed Recommendation 24.  As the Report notes, FATF still rates the U.S. as “partially compliance” as to five Recommendations and “non-compliant” as to three recommendations, out of a total of 40 Recommendations.  The U.S. is rated “non-compliant” in regards to Recommendations 22, 23 and 28, which collectively pertain to designated non-financial businesses and professions, or DNFBPs (such as lawyers, accountants, real estate agents, and trust and company service providers), in regards to customer due diligence, various “other measures” such as suspicious activity reporting, and overall regulation and supervision.

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