Questions Linger Over Corporate Ownership Registry for Industry

The anti-money-laundering law requires certain entities such as limited liability corporations to register their true owners—an attempt to crack down on the use of anonymous shell companies.

“A lot of questions have to be answered,” Sarah Runge, global head of financial crimes compliance at Credit Suisse Group AG , said on Wednesday at a Compliance Week virtual conference.

On Thursday, FinCEN took its first step toward building the registry, issuing a notice that invites the private sector to provide input on how the regulations implementing the database should be written. Under the law, FinCEN is supposed to finalize the registry rules by January.

That could prove to be a difficult deadline to meet, Ms. Runge and others said during a panel on the anti-money-laundering legislation. “Everyone needs to realize this is going to take a long time, collectively—for implementation of registry, for all the changes,” she said.

One key question looming over the anti-money-laundering law is whether and how the corporate ownership data that is collected will be verified.

The law will require certain companies to report beneficial ownership information to FinCEN upon formation. But it doesn’t stipulate whether FinCEN—or some other party, such as financial institutions or even state officials—will have to ensure that it is accurate.

Banks hope to have a say in whatever verification process, if any, FinCEN outlines in its rules. Whether the data collected by FinCEN is verified or not could have significant implications for its usefulness to the financial sector, Ms. Runge said. “Absent an obligation for that information to be verified, at this juncture it isn’t terribly helpful to a financial institution,” she said.

Compliance officers are also watching to see whether the new regulations will increase costs or legal risks or make it more difficult for companies to comply with existing regulations.

Under a customer due diligence rule completed in 2016, banks and some other financial institutions are required to collect certain ownership data on their customers. How that obligation will change as FinCEN starts collecting its own ownership data is another key concern.

The lack of a verification requirement raises questions about what happens if the ownership information a bank collects is found to be different from what FinCEN has on file. Under the anti-money-laundering law, banks will be allowed to check the FinCEN database at the consent of their customer.

“What if we discover that an entity has not registered?” said Jeffrey Harwin, head of Deutsche Bank AG’s anti-financial crime function for the Americas. “What if [the data] is inconsistent?”

“There are a whole host of things we are going to have to account for when we build actual procedures to implement the rule within the day-to-day context of our businesses,” he added.

If it turns out a customer hasn’t submitted information to FinCEN or that they submitted information that is materially inaccurate, a financial institution might have to consider refusing to do business with the client, or filing a suspicious activity report to FinCEN, panelists said.

That could be especially true if other suspicious factors are at play, they said.

The dynamic with prudential regulators, which periodically examine financial institutions on their anti-money-laundering policies and procedures, is another unknown. “At some point, an examiner is going to walk in the door and ask what’s your procedure when you have a client that has not registered [with FinCEN],” Mr. Harwin said.

Banks shouldn’t be on the hook to verify FinCEN’s database or ensure it is accurate, said Daniel Stipano, a partner at the law firm Davis Polk & Wardwell LLP.

“It’s really not their job,” Mr. Stipano said, “and I think that would be a task that would be fraught with a lot of difficulty and a lot of problems if it defaults to that and they end up having to play that role.”

Write to Dylan Tokar at [email protected]