U.S. GOVERNMENT PUBLISHING OFFICE

31–436 PDF WASHINGTON : 2018

IMPLEMENTATION OF FINCEN’S CUSTOMER 

DUE DILIGENCE RULE— 

FINANCIAL INSTITUTION PERSPECTIVE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

APRIL 27, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–90 

( 

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(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

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(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

BLAINE LUETKEMEYER, Missouri, Chairman 

KEITH J. ROTHFUS, Pennsylvania, Vice 

Chairman 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

BILL POSEY, Florida 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANDY BARR, Kentucky 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

MIA LOVE, Utah 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

WM. LACY CLAY, Missouri, Ranking 

Member 

CAROLYN B. MALONEY, New York 

GREGORY W. MEEKS, New York 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

MICHAEL E. CAPUANO, Massachusetts 

DENNY HECK, Washington 

GWEN MOORE, Wisconsin 

CHARLIE CRIST, Florida 

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(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 27, 2018 ................................................................................................... 1 

Appendix: 

April 27, 2018 ................................................................................................... 29 

WITNESSES 

FRIDAY, APRIL 27, 2018 

Baer, Greg, President, The Clearing House Association ...................................... 2 

Greene, Carlton, Partner, Crowell & Moring LLP ................................................ 4 

Kalman, Gary, Executive Director, The FACT Coalition ..................................... 5 

Martinez, Dalia, Executive Vice President, International Bank of Commerce, 

on behalf of the Mid-Size Bank Coalition .......................................................... 7 

APPENDIX 

Prepared statements: 

Baer, Greg ......................................................................................................... 30 

Greene, Carlton ................................................................................................ 42 

Kalman, Gary ................................................................................................... 45 

Martinez, Dalia ................................................................................................. 56 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Luetkemeyer, Hon. Blaine: 

Written statement from Independent Community Bankers of America 

(ICBA) ............................................................................................................ 67 

Written statement from National Association of Federally-Insured Credit 

Unions (NAFCU) ........................................................................................... 70 

Kalman, Gary: 

Written responses to questions for the record submitted by Representative Waters .................................................................................................... 72 

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IMPLEMENTATION OF FINCEN’S CUSTOMER 

DUE DILIGENCE RULE— 

FINANCIAL INSTITUTION PERSPECTIVE 

Friday, April 27, 2018 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:30 a.m., in room 

2128, Rayburn House Office Building, Hon. Blaine Luetkemeyer 

[chairman of the subcommittee] presiding. 

Present: Representatives Luetkemeyer, Rothfus, Posey, Ross, 

Pittenger, Barr, Tipton, Williams, Love, Loudermilk, Tenney, Clay, 

Maloney, Heck, Crist, and Waters. 

Also present: Representatives Pearce and Hill. 

Chairman LUETKEMEYER. The meeting will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. 

This hearing is entitled, ‘‘Implementation of FinCEN’s Customer 

Due Diligence Rule—Financial Institution Perspective.’’ 

I would like to thank the witnesses for appearing today. We appreciate your participation and look forward to your discussion. 

In the interest of time, the Ranking Member and I have agreed 

to forego opening statements and move directly to witness testimony. 

Today we welcome the testimony of Mr. Greg Baer, President of 

The Clearing House Association; Mr. Carlton Greene, Partner, 

Crowell & Moring; Mr. Gary Kalman, Executive Director of the 

FACT Coalition; and Ms. Dalia Martinez, Executive Vice President, 

International Bank of Commerce, on behalf of the Mid-Size Bank 

Coalition of America. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. Without objection, each of your written 

statements will be made part of the record. 

A little bit on the lighting system. Green means go, yellow means 

you have a minute to wrap up, and red means you should be closing up and moving on. 

We do have votes in the 10:30 to 11 o’clock range, somewhere in 

there. We hope to be able to get as far down the road as we can. 

That is why we have done away with opening statements. 

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Depending on how many participants we have in the committee 

today, we will continue after votes, if we need to. So hopefully, we 

will get a lot done between now and then. 

With that, Mr. Baer, you are recognized for 5 minutes. 

STATEMENT OF GREG BAER 

Mr. BAER. Thank you. 

Chairman Luetkemeyer, Ranking Member Maloney, and members of the subcommittee, thanks for the opportunity to testify 

today on FinCEN’s CDD (Financial Crimes Enforcement Network 

Customer Due Diligence) Rule. It is a particular pleasure to testify 

before you, Mr. Chairman and the Ranking Member, with whom it 

has been a true pleasure working with you and your staff on these 

issues now for some time. 

The Clearing House believes that the FinCEN CDD Rule and its 

beneficial ownership requirement can provide law enforcement 

with useful information as it seeks to learn more about suspect 

companies. We particularly appreciate FinCEN’s decision to grant 

financial institutions some flexibility in how they collect and certify 

beneficial ownership information, which was the product of a laudable notice and comment process by FinCEN. 

We do, however, have one primary concern with the final rule 

and broader concerns about guidance used to interpret it and the 

examination process that is expected to enforce it. 

As for the rule, it requires covered financial institutions to reconfirm the beneficial owners of a customer each time the customer 

opens an account. This requirement is burdensome for customers 

that routinely open multiple accounts on the same day or within 

a short period of time. For example, title companies can open multiple accounts daily to assist in closing real estate transactions, and 

large companies frequently open accounts for many reasons. 

The cost in customer inconvenience of reconfirming ownership 

with each new account do not appear to come with any corresponding benefit, as there generally is no reason to believe that 

the opening of a new account is evidence that the ownership of the 

customer has changed. 

The new account requirement is complicated further by guidance 

released by FinCEN on April 3 in the form of FAQs. While the 

Clearing House generally appreciates FinCEN’s efforts to provide 

additional guidance, unfortunately, in some areas, the guidance 

has expanded rather than interpreted the final rule in unexpected 

ways. 

Most significantly, FAQ 12 states that even the rollover or auto 

renewal of an account, for example, a deposit or a loan, constitutes 

a new account. Again, there is no reason to believe that the rollover 

of a 1 month CD is evidence of a change in ownership in the customer. 

Since adoption of the CDD Rule in 2016, financial institutions 

have invested millions and rebuilt their internal systems, which 

would need to be significantly modified to accommodate this direction which came only 1 month before the go live date. 

The FAQ 12 guidance is even more troubling, given that these 

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fore, on May 11, financial institutions will be forced to choose between breaching their contracts with customers or following the 

FAQ. 

We note that FinCEN in its FAQs has attempted to resolve this 

issue by providing that, during the initial certification of beneficial 

ownership, the customer can simply agree to notify of any future 

change. We hope and expect that FinCEN will revisit the question 

of existing accounts where that agreement has not already been obtained. However, even as FinCEN considers this issue, we are quite 

concerned that examiners at the regulatory agencies will treat 

guidance as a binding rule and cite banks for violations of law for 

honoring their contracts in their traditional zero tolerance approach to AML (anti-money laundering) compliance. 

Of course, new beneficial ownership requirements for banks highlight the need for broader legislation to prohibit the formation of 

anonymous companies, as many criminals launder money by forming LLCs and using them to hold real estate or other valuables, all 

without even touching the banking system. For this reason, we continue to support your legislation ending anonymous ownership of 

U.S. companies. 

With respect to implementation of the CDD Rule, we believe that 

FinCEN compliance examinations—BSA (Bank Secrecy Act) compliance examinations should follow FinCEN’s rule and not seek to 

amend or interpret it, either at the agency level or through ad hoc 

examiner judgment. For example, public reports have indicated 

that the banking agencies have considered directing institutions to 

collect beneficial ownership at a 10 percent equity threshold in 

some cases. However, FinCEN was very clear in its rule that the 

standard is 25 percent. 

More broadly, my written testimony describes the profound dysfunction in the current AML regime where banks are judged on 

SARs (suspicious activity reports) they don’t file, rather than the 

value of the ones they do, where no priorities are set and where 

the hallmarks of the regime are box checking and compliance for 

compliance’s sake. 

The result is a system that is doing far less to assist law enforcement and national security than it could, and a system with extraordinary collateral costs, everything from pushing LMI customers out of the banking system and into the hands of check 

cashers and payday lenders, to forcing global banks to exit certain 

countries or regions at risk of sanction. 

In the now 2 years since we began raising these issues, it has 

been gratifying to see the building of a broad bipartisan consensus 

that major changes are necessary to the system. But I am sad to 

report that, by all accounts, nothing much has changed in the 

banking agencies’ examination and enforcement of the regime. 

Hearings like this and the draft legislation under consideration are 

important steps in turning this consensus into real reform. 

Thank you very much. 

[The prepared statement of Mr. Baer can be found on page 30 of 

the Appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Baer. 

Mr. Greene, you are recognized for 5 minutes. 

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STATEMENT OF CARLTON GREENE 

Mr. GREENE. Thank you, Mr. Chairman. I appreciate the opportunity to address the subcommittee. 

My name is Carlton Greene. I am a Partner at Crowell & 

Moring. I am formerly the Chief Counsel of FinCEN. Before that, 

I served a number of years at Treasury working for the Office of 

Foreign Assets Control on sanctions activities against—U.S. sanctions regimes against Iran, North Korea, transnational criminal organizations, and terrorist actors. 

So since leaving FinCEN, I have been now 2 years in private 

practice working in the economic sanctions and anti-money laundering areas, primarily for financial industry clients. And I think 

it has given me a balanced view on the critical mission that 

FinCEN plays, but also the enormous efforts that private industry 

puts into complying with the Bank Secrecy Act, the burdens associated with it, how seriously that they take it, and how much they 

work every day to try and comply with it, much of which is not 

seen by regulators. 

There are just a few points I wanted to make today. One is that 

I think the CDD Rule represents a very important advance in the 

information available to FinCEN. Information on beneficial owners, 

I think, will allow FinCEN to draw all kinds of connections that 

were not previously available to it in the fight to detect and deter 

financial crime. I think that is critical information. 

I think that FinCEN deserves credit for having gotten this rule 

across the line. This is a rule that has been 10 years in the making. FinCEN conducted extensive public outreach associated with 

the rule. It incorporated a lot of the comments that industry provided. It showed a willingness to engage with folks and have a real 

back-and-forth dialog. 

I also think that the FAQs that FinCEN put out, again, show 

considerable responsiveness to the concerns that industry raised 

about the rule and the questions that they had about the rule. 

I think that kind of partnership bodes well for the future of the 

rule and its implementation. 

On the banking side, I think that banks and other covered financial institutions, likewise, put an enormous amount of effort into 

informing FinCEN’s work on the rule, helping it to understand 

what kind of ideas would impose impossible burdens on the industry or otherwise wouldn’t generate the kind of benefits FinCEN 

was hoping for. 

I know that the CDD Rule comes on top of the many burdens 

that these institutions already face. And I know firsthand, from my 

experience in private practice, how much time, effort, expense goes 

into maintaining AML compliance programs, much of which is 

never seen by regulators. 

I know also that the professionalism with which every financial 

institution I have dealt with has approached this issue. So I think 

there is a lot of credit to be given on both ends. 

A few points about the rule itself and about the future of the 

AML regime. I think the FAQs, although they provide important 

interpretive guidance and have solved a number of the problems 

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ance questions that still remain out there, and I have given a list 

of several of these in my testimony. 

My hope is that FinCEN will continue to work closely with the 

regulating community to address these questions to provide public 

guidance where possible on them, but always to listen and offer its 

thoughts on the approach to these so that industry knows the way 

to go forward and that implementation is reasonable and possible. 

I also hope that in the early years of implementing the rule, that 

they will be lenient about enforcement, understanding the inevitable but unexpected obstacles that will arise. 

The second point I wanted to raise is a broader issue about AML 

regulation and relates to FinCEN’s relationships with the prudential banking regulators. One of the concerns I have, and I think I 

share with Mr. Baer, is that because FinCEN has delegated examination authority to the Federal banking regulators—the Federal 

functional regulators, I should say, more broadly, and because 

these agencies have their own—use their own independent authorities to enforce Bank Secrecy Act obligations, I think there is some 

risk there that there will be divergent interpretations of the Bank 

Secrecy Act or that enforcement priorities across all these different 

agencies will not necessarily line up with those that most advance 

FinCEN’s mission of detecting and deterring financial crime. 

FinCEN, I think, is uniquely positioned in that it has access to 

financial threat information and it also understands the regulatory 

process. And I think it is uniquely positioned to balance those two 

together to ensure that enforcement is calibrated to the actual 

needs to address financial threats. In the absence of that dual 

knowledge, I think there is a potential for overly formalistic enforcement of the Bank Secrecy Act. 

I am happy to comment further if needed. Thank you. 

[The prepared statement of Mr. Greene can be found on page 42 

of the Appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Greene. I appreciate 

your testimony. 

Mr. Kalman, you are recognized for 5 minutes. 

STATEMENT OF GARY KALMAN 

Mr. KALMAN. Chairman Luetkemeyer, Ranking Member Clay, 

and members of the subcommittee, thank you for the opportunity 

to appear before you. 

On behalf of the Financial Accountability and Corporate Transparency (FACT) Coalition, I appreciate the opportunity to discuss 

FinCEN’s Customer Due Diligence Rule and the importance of collecting beneficial ownership information. 

This remains a critical element in the larger effort to address 

grand corruption and the nexus between secrecy jurisdictions, 

crime, corruption, human rights, and national security. FACT Coalition is a nonpartisan alliance of more than 100 State, national, 

and international organizations working to combat the harmful impacts of corrupt financial practices. 

Before addressing the particulars of the CDD Rule, I thought it 

was important to review why the collection of this information matters. As detailed further in my written testimony, the rule is a 

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positive step forward, but falls short of what is needed to protect 

the integrity of our financial system. 

Anonymous companies have become the vehicle of choice for drug 

cartels, organized crime, corrupt foreign officials, and others who 

need to launder money. These entities are able to profit from these 

funds, prop up their regimes, and engage in a host of harmful actions. 

A few quick examples. A Moldovan gang used anonymous companies from Kansas, Missouri, and Ohio to trick victims from overseas in a $6 million human trafficking scheme. Traffickers in counterfeit and other illicit goods and services often hide behind corporate entities to make it more difficult for legitimate businesses 

to honestly engage in global commerce. 

As Congress considers new sanctions to counter North Korean 

threats, the committee should take note of a U.S. Department of 

Justice case charging a Chinese national and several colleagues 

with violating U.S. sanctions laws by working with a blacklisted 

North Korean bank to set up shell companies in Hong Kong and 

elsewhere to hide the business they were doing with North Korean 

companies that helped them to develop nuclear weapons. 

We agree on the need for the CDD Rule as a step toward a comprehensive approach to prevent the abuse of anonymous companies 

and launder money through our financial system. 

The rule was published in 2016. Financial institutions have had 

2 years to prepare for the implementation of the rule. Many U.S. 

financial institutions already routinely collect beneficial ownership 

information as part of their know-your-customer obligations. We do 

not see a need for the delay in the implementation of the rule. We 

have no position on whether or not, if there are good-faith efforts 

that have been made by financial institutions, to have reasonable 

accommodation on enforcement actions. 

The Coalition does have a concern about the rule’s definition of 

beneficial owner. The rule does exclude the concept of entitlement 

to funds, thereby enabling a corporate officer to be deemed the beneficial owner of a corporation. That officer has no ownership rule 

or entitlement to the corporation’s funds. 

The Coalition favors a consensus definition that was already approved overwhelmingly by Congress in last year’s National Defense 

Authorization Act. In the NDAA of Fiscal Year 2018, a provision 

was included to require the Department of Defense to collect beneficial ownership information when leasing high-security office 

space. That definition, with its focus on natural persons who ultimately control or benefit from a legal entity, is important to prevent the shell games in which one company owns another, which 

in turn owns another and so on, all to obfuscate the name of the 

individuals who exercise ultimate control. 

The rule is only one part of an overall strategy to address the 

abuse of anonymous companies. Bad actors have established U.S. 

companies to purchase real estate, aircraft, and other large ticket 

items with cash. Companies have been created in the U.S. only to 

route money from one jurisdiction to another, bypassing the U.S. 

banking system. 

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While financial institutions represent the largest gatekeeper to 

the U.S. financial system, they are not the only gatekeepers. And 

as such, Congress should be looking beyond the rule. 

There are at least two proposals currently pending in the House 

Financial Services Committee to strengthen corporate transparency 

by improving beneficial ownership disclosures. 

We thank Chairman Luetkemeyer for his leadership, along with 

Chairman Pearce, for sponsoring the Counterterrorism and Illicit 

Finance Act; and Representatives Pete King and Carolyn Maloney 

for cosponsoring the Corporate Transparency Act. Both proposals 

require companies to name the beneficial owners at the time of formation and both include language consistent with last year’s 

NDAA. 

The CDD Rule, the NDAA provision, and Treasury’s geographic 

targeting orders are all important steps. But they are not a substitute for a consistent national standard that levels the playing 

field for all States and corporate entities. 

Thank you, and I look forward to any questions. 

[The prepared statement of Mr. Kalman can be found on page 45 

of the Appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Kalman. 

Ms. Martinez, you are recognized for 5 minutes. Welcome. 

STATEMENT OF DALIA MARTINEZ 

Ms. MARTINEZ. Chairman Luetkemeyer and members of the subcommittee, I am honored to have this opportunity to present testimony today. 

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, 

a $12.2 billion multibank financial holding company in Laredo, 

Texas. We have 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 (MBCA), 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 BSA Officer at IBC for more than 27 

years. BSA compliance is a top priority for us, and I have seen 

firsthand 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 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, 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. 

Every hour a bank employee spends on regulatory compliance is 

an hour that employee is not able to spend on what we value most: 

Helping our customers achieve financial success. 

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Second, the CDD Rule has many gray areas that are difficult to 

implement. Let me provide you an example that illustrates this. 

Bank frontline 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 control person may have knowledge of the ownership structure of the company, they often will not have the identification required for the CDD requirement. This may result in accounts being turned away and delays in opening accounts. 

Third, the rule puts a burden on banks to ensure the information 

the customer provides is accurate. But banks are not given the 

tools they need to make that determination. Banks can rely on the 

information that customers disclose about the ownership structure 

of the company, 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 that 

already exists within the bank? 

Unlike some countries, the United States does not maintain a 

national database of business ownership information that a financial institution can rely on. Tools and guidance from FinCEN designed to help banks verify customer information are needed. 

Fourth, while FinCEN has provided some guidance to banks in 

the form of FAQs, some of the FAQs are not clear, and others create an even greater burden on banks and, ultimately, bank customers. One such example is with certificates of deposit 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 records and email addresses with the bank on 

a regular basis. Therefore, we will mostly like have to rely on mail. 

If the customer does not respond to the bank’s request, are we to 

return the funds to the customer or track exceptions? 

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 regulations. 

In closing, on behalf of IBC and MBCA, I hope I have conveyed 

to you that regulatory costs and burdens imposed on banks affect 

our Nation’s small businesses. 

It is critically important that FinCEN provide clear and effective 

guidance; otherwise, our prudential regulators will be left to their 

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own interpretations, and ultimately, this will result in customers 

simply being driven out of the traditional banking system. 

Thank you. 

[The prepared statement of Ms. Martinez can be found on page 

56 of the Appendix.] 

Chairman LUETKEMEYER. Thank you, Ms. Martinez. 

With that, we will begin our questions. I will recognize myself for 

5 minutes. 

One of the concerns that we have had—and Chairman Pearce 

and I are working on a BSA/AML bill, and part of it is to get this 

beneficial ownership situation resolved. 

One of the problems that we see is that the banks are being deputized to become law enforcement officers by this rule from Treasury, and it is costing literally millions and millions of dollars. One 

large bank I was talking to actually has over a thousand employees 

that do nothing but take care of BSA/AML, and now they are going 

to have to deal with this beneficial ownership situation. 

So, Mr. Greene, you tell me that you have been involved with 

FinCEN for quite some time, and you like the rule, according to 

your testimony. Can you tell me, do you think FinCEN could be 

able to collect information by themselves? That is what we proposed in our bill. Is that going to work or not? 

Mr. GREENE. Thank you, Mr. Chairman. If by that you mean if 

they were to collect beneficial ownership directly themselves— 

Chairman LUETKEMEYER. Right. 

Mr. GREENE. —and to make use of it. Yes, I think that is a possibility. 

Chairman LUETKEMEYER. That is a viable solution. Is that what 

you are saying? 

Mr. GREENE. It is potentially a viable solution, yes, sir. And I 

also think that speaks to a separate issue, which is that there is 

only so much that financial institutions are in a position to gather. 

Putting aside the burden, just as a practical matter, I think Mr. 

Baer mentions some of the circumstances that as useful and as important as the CDD Rule is, there are types of information—companies that will not be covered by it in terms of beneficial ownership 

information. And that would include, for example, an LLC that is 

established in Delaware but keeps its accounts overseas and directs 

its operations overseas. That would not be covered by the CDD 

Rule because it would not be banking with a U.S. financial institution. 

Chairman LUETKEMEYER. I had my taxes filled out during the— 

about a month ago. And I asked my accountant, I had this—we had 

this situation, this problem. I said, is there another way that 

FinCEN could collect the information? And he said the IRS already 

has all this beneficial ownership information. And since IRS is 

within the Treasury Department, which is where FinCEN is, you 

would think you would be able to just give them a call and say, 

hey, can you give us this information with regards to the XYZ company. 

Is that a viable solution? 

Mr. GREENE. Thank you, Mr. Chairman. I have not—I will confess I have not looked at the specific beneficial ownership information available to the IRS. I do know that, in the past, there have 

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been legal impediments to using taxpayer information for purposes 

of financial threat analysis on the FinCEN side. 

Chairman LUETKEMEYER. OK. So according to my accountant, 

they already have this information, because you have to file it 

when you file your tax returns. So if we could do something in the 

bill, for instance, to say something to the effect that we would allow 

FinCEN to have access if they have some sort of cause to be able 

to go looking for this information, would that be a viable solution? 

Mr. GREENE. Certainly, I think that FinCEN could make very 

good use of any beneficial ownership information that might already be in the Government. 

Chairman LUETKEMEYER. That would certainly streamline 

things, wouldn’t it? 

Ms. Martinez, you were adamant in your discussion here and 

your testimony a minute ago with regards to concerns you had 

about, and to me it is a real problem, with regards to de-risking. 

And some of the banks, that they just, in order to get rid of this 

problem, may just not take these kinds of customers on. 

Would you like to elaborate a little bit on the de-risking problem 

here? We see this throughout all sorts of other things going on 

right now, and seems like we are compounding the problem here 

with this rule. 

Ms. MARTINEZ. Thank you, Chairman. Yes, that is very true. The 

issue of de-risking is very real in all financial institutions, and it 

is primarily a result of the fact that there is not definitive guidance. And so individual examiners, from exam to exam, may 

change their position on how they evaluate certain types of accounts and the requirements that they ask the banks to follow for 

documenting risk on these types of customers. 

So at some point, it just becomes too burdensome to continue to 

ask for information from the customer, or the customer just gives 

up because we are asking for too much information. And so we derisk that account or group of accounts, and that customer goes to 

another financial institution and starts all over again. 

I don’t think that helps our goal here of trying to combat money 

laundering. 

Chairman LUETKEMEYER. My time is about up. I just want to ask 

you for one more quick comment. You also talked about the problem with the lack of clarity with regards to the guidelines. Would 

you like to just take a couple of moments and elaborate on that as 

well? 

Ms. MARTINEZ. Well, I will talk about the 25 percent beneficial 

rule. In FinCEN’s FAQs, they talk about that the banks can use 

another threshold, a lower threshold, for accounts that they deem 

higher risk. I think that is very dangerous that we don’t have a 

bright line, because that will leave the examiners open to interpretation. 

Chairman LUETKEMEYER. Thank you very much. 

With that, I will go to the Ranking Member, Mr. Clay from Missouri, for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. Let me thank the witnesses for being here. 

Mr. Kalman, to what extent does FinCEN’s final CDD Rule address the deficiencies that have been cited by the Financial Action 

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Task Force as part of its periodic reviews of our Nation’s antimoney laundering and counter-terrorist financing framework? 

Mr. KALMAN. Thank you for the question. It addresses some of 

it. In fact, the Financial Accounting Task Force has issued several 

reports—two—I think one in 2006 and one in 2016, calling out 

some deficiencies in our anti-money laundering regime. They actually did say that we had some very strong rules, but where we 

were lacking was in the collection of beneficial ownership information and in requiring due diligence requirements upon the gatekeepers to the financial system. That wasn’t just the banks, that 

was real estate industry, accounting industry, and some others. 

So this addresses a piece of the puzzle to positive steps forward, 

we would argue, but it is not complete. 

Mr. CLAY. During FinCEN’s rulemaking process, some commenters questioned whether the requirement to collect and verify 

beneficial ownership information would be more appropriately 

placed on State governments responsible for the formation and registration of legal entities and/or, alternatively, on a Federal entity 

such as the IRS or FinCEN. 

Can you discuss why it is important to require financial institutions to collect and verify the beneficial ownership information of 

their legal entity customers, and separately, to also require States, 

FinCEN or some other Federal entity, to collect this information as 

part of the company formation process? 

Mr. KALMAN. So actually, as Mr. Greene alluded to, I think there 

are two different purposes for the different entities to collect. So 

one—as a matter of fact, there is a quote that I had found when 

I was preparing for the testimony, from Jennifer Shasky, formerly 

of FinCEN. It said the two initiatives, the CDD Rule and beneficial 

ownership draft legislation, dovetailed together. The CDD Rule focuses on financial institutions knowing who the legal entity customers are regardless of where the entities are formed. And then 

the proposed legislation focuses on making sure the legal entities 

are formed in the United States, are more transparent to law enforcement regardless of where the conduct of the financial activity 

is. 

So there are two separate things; we would argue, both are important if we are really going to plug the holes. 

Mr. CLAY. I see. In what way does the CDD Rule complement 

proposals pending consideration before this committee to require 

the collection of beneficial ownership and information as part of the 

company formation process? How does it complement it? 

Mr. KALMAN. Again, if law enforcement is to get a full picture 

and know both where the legal activity is taking place and at the 

State level, we think that both are necessary for law enforcement 

to have the full picture. And so we do very strongly support the 

proposals in the committee, Mr. Luetkemeyer’s proposal with Mr. 

Pearce, Mrs. Maloney’s proposal, and we think both are necessary 

if you are actually going to look at the full picture and make sure 

that there are not loopholes through which the criminals can slip. 

Mr. CLAY. Now, has law enforcement complained about the process or do they find it to be effective? 

Ms. Martinez, does law enforcement find this process to be effective or not? 

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12 

Ms. MARTINEZ. I can only share with you anecdotal information 

from law enforcement or FinCEN, and I can also share with you 

my own personal experience. 

I can tell you that of the thousands of SARs that we file, I can 

tell you there are less—I have an example of less than half a dozen 

cases that I know of that had actually turned into some sort of a 

prosecution. I am not saying the information is not helpful. It possibly is. However, there is insufficient transparency from FinCEN 

to the financial institutions as to how helpful that information actually is. 

Mr. CLAY. So you don’t get a response back once the information 

is turned in? 

Ms. MARTINEZ. Very, very, very rarely. 

Mr. CLAY. I see. My time is about up. 

Mr. Chairman, thank you. I yield back. 

Chairman LUETKEMEYER. OK. We next go with Mr. Tipton from 

Colorado, is recognized for 5 minutes. 

Mr. TIPTON. Thank you, Mr. Chairman. I thank the panel for 

being here today. 

I believe that the Customer Due Diligence Rule is well intentioned. In my district in Colorado, which has a high amount of drug 

cartel activity, its effects will be felt. 

Being able to share some of that beneficial ownership information with law enforcement will help some of the—and effectively 

combat bad actors in Colorado and across the country, which will 

in turn make some of our communities safer. 

That being said, I also believe that the rule needs to be implemented in the commonsense, harmonized manner that takes into 

account the burden of collecting the information and sharing it 

with law enforcement and what that will have in terms of impact 

on our financial institutions. 

Mr. Baer, I would like to start with you. You mentioned in your 

testimony that recent guidance from FinCEN detracts from the 

clarity and predictability of the CDD Rule. Would you briefly discuss what clarity, predictability in these kinds of rulemakings is 

important for our financial institutions? 

Mr. BAER. Sure. Thank you, Congressman. I think just to start 

in a most general manner, I think clarity is really important not 

just only in the rules in general across any type of regulation, but 

particularly in this area where we have this very odd construct 

where FinCEN is the rule writer but has delegated, and I would 

argue, abdicated responsibility for the examination of the institutions subject to those rules. 

So as I think several of the witnesses have alluded to, enforcement really comes through an examination process through the 

banking agencies and other Federal financial regulators. They are 

not regularly in touch with FinCEN, FinCEN does not set priorities 

for them, as any other law enforcement or intelligence agency 

would, for those who are deputized for carrying out the activity on 

the ground. 

So that is why in this area we are quite concerned to the extent 

that there are any gaps or vagueness in FinCEN’s rules or guidance, because that will be resolved, unfortunately, through a series 

of examinations with examiners having different opinions, potennshattuck on FSR297 with DISTILLER

13 

tially agencies having different opinions, and all with banks being 

at extraordinarily reputational enforcement risk to the extent that 

they get anything wrong. 

So, an example a couple of us talked about with the auto renewals of CDs, it is effectively impossible for banks in a 1-month period 

to produce a system where they are reconfirming a customer account on a rollover of a CD. So they now effectively are going to 

have to be inconsistent with that guidance, which is not a rule, but 

really to honor their contracts. But we don’t know what the banking agencies are going to do on the ground when they examine 

them. 

Mr. TIPTON. So it would be fair to be able to say that the covered 

entities really don’t have a clear understanding of what areas to be 

able to focus on to ensure that they can comply with a CDD Rule? 

Mr. BAER. I think in some areas they do, but I think there are 

certainly other areas where they do not. 

Mr. TIPTON. Do you have a comment on that, Ms. Martinez? 

Ms. MARTINEZ. I think the regulation is pretty simple, but the 

execution of the regulation is very complicated. And so I think that 

the current FAQs that are out there, while they are helpful, they 

are insufficient. 

Mr. TIPTON. A consistent theme that we touch on in this committee is the need for harmonization between the regulators and 

the rulemaking. As FinCEN is not the supervisory or examining 

agency which you have spoken to in your testimony, when it comes 

to reviewing BSA and AML compliance, do you think that the Federal banking regulators are familiar with the CDD to conduct fair 

and effective BSA reviews? 

Mr. BAER. I think certainly their task has been somewhat complicated through the recent FAQs which have opened up some new 

issues. I think really time is going to have to tell, I think as Ms. 

Martinez indicated, as they fan out to examine the thousands of institutions subject to this rule, we don’t know what approach they 

are going to take. I mean, clearly, there are issues yet to be resolved, and I think FinCEN has every intention of attempting to 

be helpful, perhaps providing further guidance, but they ultimately 

are not the ones who decide whether they are going to give a bank 

an MRA or formally or informally sanction it for perhaps a technical violation of this guidance. 

Mr. TIPTON. I would like to follow up on a comment Ms. Martinez 

had mentioned in regards to having a bright line. You need to 

know exactly what you are going to be dealing with. 

Community bankers in my State of Colorado, they raised a concern that the rule is going to have a negative effect on their volume 

of business when we are talking about having to re-verify a customer that is just having a CD rollover. So what are some of the 

real impacts that you will see in that area? 

Ms. MARTINEZ. Well, the problem is that there is one unanswered question. FinCEN says that the information should be gathered at account opening. FAQs now say that a CD rollover is considered a new account opening. And so if we are to gather that information at account opening, if the customer is not present, as I 

described is the case with CD rollover accounts, then how are we 

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14 

to obtain that information, other than by mail or some other method? 

So if the customer is not present, then the account technically 

can’t be opened, I am assuming. I am not sure because FinCEN 

hasn’t been clear about that. 

Mr. TIPTON. Thank you for your testimony. 

My time has expired. Thank you, Mr. Chairman. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

With that, we go to the gentlelady from New York. Mrs. Maloney 

is recognized for 5 minutes. 

Mrs. MALONEY. I want to thank the Chair and the Ranking 

Member and all the panelists for addressing this incredibly important issue. It is one that I have been working on for over 10 years. 

The problem that we are trying to address is simple. Criminals 

and terrorists, terrorist financing, have always used anonymous 

shell companies to finance their operations, because they never 

have to disclose who actually owns them. And there is no way for 

law enforcement to figure out if a transaction conducted by a shell 

company was actually done by a criminal organization. 

It was actually in response to law enforcement in New York City 

who came to me with the need to crack down on this, because they 

would go right up to the LLC and then they couldn’t get anymore 

information. 

The solution is really a simple one. Companies should have to 

disclose their beneficial owners at the time they are formed. But 

because no State requires companies to disclose their beneficial 

ownership, FinCEN passed a rule in 2016 that requires banks to 

identify the beneficial owners of any companies that open accounts 

with them. 

FinCEN’s Customer Due Diligence Rule is very important because it is the first step toward cracking down on these anonymous 

shell companies, and it will ensure that criminals and terrorists 

aren’t using our financial system to operate their schemes. But the 

FinCEN rule by itself is not the solution. 

Ideally, companies would be disclosing their beneficial owners 

when they are formed, and then financial institutions would have 

access to this beneficial ownership information so that they can assure themselves that companies that open accounts with them are 

not criminals or money launderers. 

I would like first to ask Gary Kalman—and we have worked together on beneficial ownership for years, and I want to thank you 

and the FACT Coalition for your constant focus on this. 

You noted in your testimony that you believe the FinCEN rule 

is important, but it is not sufficient in itself. 

If Congress were to pass a beneficial ownership bill, like the bill 

I have introduced, would that complement the FinCEN rule or 

would it replace the FinCEN rule? 

Mr. KALMAN. Thank you for the question, Mrs. Maloney, and 

thank you for your leadership as well on this issue. We think that 

it complements the rule. It is not a replacement. We think that the 

legislation you have introduced will cover companies that bypass 

the financial system and avoid banks so you are having much 

broader coverage. 

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15 

One thing I would also add which I didn’t say before is we actually also think that it is helpful, and folks on this panel can correct 

me if they disagree, but I think they will say that this is a help 

with financial institutions, realtors that may be—if we give access 

to other gatekeepers to the financial system, then this helps the entire system function and gives law enforcement the information 

and the tools that they need. 

So we actually think it is not only good for cracking down on bad 

behavior and illegal and illicit activity, but we also think that it 

serves as a help to the other institutions we are asking to help us 

with cracking down on this. 

Mrs. MALONEY. And that leads to my next question which I 

would like to direct to Mr. Baer. You noted in your testimony that 

the FinCEN rule is burdensome for banks because it puts all the 

onus on the banks to collect beneficial ownership information. 

And I agree with that statement, particularly mid-sized smaller 

banks, they are having tremendous trouble gathering this information. The responsibility shouldn’t all be on the banks. Banks are required to know their customers, but it shouldn’t have to be this 

hard to find out actually who they are. Would passing my Corporate Transparency Act help alleviate this burden on banks? 

Mr. BAER. Congresswoman, yes, absolutely. I think it just makes 

common sense. It makes much more sense. 

Mrs. MALONEY. How much regulatory relief would passing my 

bill mean to banks? 

Mr. BAER. I think substantial. And it is funny, it is just so much 

simpler as a commonsense matter to say at the outset when you 

form your company who owns it, and then each bank can rely on 

that information, every bank doesn’t have to redo that work. 

Mrs. MALONEY. And finally, if Congress does pass a beneficial 

ownership bill, should the definition of a beneficial owner in the 

bill be exactly the same as the definition in the FinCEN rule? Or 

should the bill’s definition be broader than FinCEN’s definition in 

order to ensure that all the beneficial ownership information is 

compiled? 

Mr. Baer, quickly. I am out of time. 

Mr. BAER. I think ideally they would be consistent. The one bad 

outcome would be if the CDD Rule were broader, because then 

compliance with the beneficial ownership legislation would not suffice for CDD. So some could argue perhaps it should be broader. 

But I think ultimately the best idea would be consistent. 

Mrs. MALONEY. OK. Thank you. 

Chairman LUETKEMEYER. The gentlelady’s time has expired. 

With that, we go to the gentleman from Georgia. Mr. Loudermilk 

is recognized for 5 minutes. 

Mr. LOUDERMILK. Thank you, Mr. Chairman. 

It is my understanding that financial regulators may expect institutions to collect beneficial ownership information at a lower equity interest threshold, and failure to do so may result in negative 

examination findings. 

In fact, in their latest FAQs, FinCEN states that, and I will 

quote, financial institutions may reasonably conclude that collecting beneficial ownership information at a lower equity interest 

than 25 percent would not help mitigate the specific risk posed by 

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the customer or provide information useful to the financial institution in analyzing the risk. Rather, any additional heightened risk 

could be mitigated by other reasonable means, such as enhanced 

monitoring or collecting other information, including expected account activity in connection with the particular legal entity customer. 

Mr. Baer, what risk posed by the customer may be mitigated by 

collecting beneficial ownership data at a lower threshold? 

Mr. BAER. Thank you, Congressman. We strongly support a 

bright-line rule of 25 percent. We believe that is the clear intent 

not only of the CDD Rule, but also the guidance issued by FinCEN. 

And we believe, in just about every case, that is certainly sufficient 

to have people on the hook and searchable by law enforcement. If 

they are interested in a company and want to know who owns it, 

a 25 percent threshold, we believe, is sufficient. 

There certainly may be cases where monitoring or investigation 

of a company leads you to believe, well, this is a case where people 

have below 25 percent ownership, but there is some reason to think 

maybe they are acting in concert, or something like that, where, 

yes, we would want to have reporting at a lower level. But we believe strongly that should be on a facts and circumstances basis, on 

a risk basis by an assessment by the financial institution and that 

that rule shouldn’t get rewritten by guidance or interpretation. 

Mr. LOUDERMILK. Right. 

Ms. Martinez, do you have any thoughts on this? 

Ms. MARTINEZ. I think that most of my colleagues would agree 

that financial institutions take this responsibility very seriously, 

and we are personally responsible for the programs in our bank. So 

when we see risk, then we want to address that risk. And I agree 

that we should have a 25 percent bright line. But it should be up 

to banks to decide if, on a risk-based approach, they should look 

at an account differently. I don’t think that that should be left to 

examiners, because individual examiners have different types of 

customer groups that they just are concerned about, and so then 

they force banks into lowering thresholds that are not clearly defined by the regulation, and that hurts customers. 

Mr. LOUDERMILK. OK. Mr. Baer, would lowering the threshold 

provide additional information that would otherwise be more useful 

to you in analyzing the risk? 

Mr. BAER. Again, Congressman, I think generally the consensus, 

and certainly, I mean—I should emphasize FinCEN did a very rigorous and comprehensive notice and comment rulemaking on this, 

and I think ultimately they concluded, as I think most financial institutions concluded, that 25 percent threshold is appropriate, it 

strikes the right balance, and that is enough to know about the 

ownership of a company. 

Again, there can always be cases where banks may have reason 

to investigate further, but we think that suffices for law enforcement purposes. 

Mr. LOUDERMILK. One quick follow up. If a financial institution 

chooses to collect beneficial ownership information to the 10 percent level on some high-risk customers, they must then clearly distinguish to which high-risk customers a lower threshold would be 

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applied and choose how soon that information must be completed 

after the high-risk designation. 

So what if the customer fails to comply or fails to comply in a 

timely manner? Will the financial institution close the account because the customer is not cooperative, even though the actual regulatory requirements for the collection of beneficial ownership information have not been met—or have been met? 

Mr. BAER. I may defer to Ms. Martinez on this. My assumption 

is that if the customer would refuse to provide that information, in 

all likelihood you would file a SAR and then perhaps close the account. 

Ms. MARTINEZ. You just described one of the primary reasons 

that banks de-risk. 

Mr. LOUDERMILK. OK. Thank you. 

I yield back, Mr. Chairman. 

Chairman LUETKEMEYER. The gentleman from Georgia yields 

back. 

With that, we go to the gentlelady from California, the Ranking 

Member of the full committee. I am going to recognize her for a 

point of personal privilege, and then we will recognize her after 

that for 5 minutes of questions. She is now ready to go. 

Ms. WATERS. Thank you very much, Mr. Chairman and Ranking 

Member. 

Before I begin the questions, I would like to first recognize the 

hard work of one of my staffers, Kirk Schwarzbach, as today is his 

last day, after more than 10 years on the committee. Kirk came to 

the committee in 2008 and started at the front desk. Today, he now 

manages a portfolio that spans monetary policy, currency and 

coins, various consumer protection issues, international development, and counter-terrorism and illicit finance. 

Beyond being a brilliant individual, Kirk is also very friendly, 

warm and caring. His compassion to advocate good policy on behalf 

of Americans he may never meet is only surpassed by his dedication. 

Kirk is not going far, as he is going to be joining the Congressional Affairs Office at the Federal Reserve. But certainly we are 

going to miss him. 

Thank you, Kirk. 

Chairman LUETKEMEYER. The gentlelady is now recognized for 5 

minutes for questions. 

Ms. WATERS. Thank you very much. 

As you know, FinCEN began the process of developing its Customer Due Diligence Rule in March 2012, and it was more than 6 

years ago when it issued an advance notice of a proposed rulemaking. After a 4-year rulemaking process in 2016, FinCEN finalized the CDD Rule and provided covered financial institutions a 2- 

year delay before they would have become compliant, which will be 

on May 11, 2018. 

Do you believe that this 2-year delay was adequate with respect 

to giving banks time to put the necessary processes in place to collect this information? And this is for Mr. Kalman. 

Mr. KALMAN. Thank you for the question. As I said in my testimony, we think that it is reasonable. Banks have had 2 years to 

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comply with the rule, and it is reasonable for the rule to go into 

effect. We don’t see a need for delay. 

I did also say, for banks that—if there are banks that have ignored the rule and didn’t do anything, then they need to do so. But 

for those banks that did take good-faith efforts and there is some 

misinterpretation—not misinterpretation, that is the wrong word— 

if there are some banks that because of the FAQ that has created 

confusion feel that they are not in compliance, we don’t take a position on a reasonable time-specific accommodation in terms of enforcement. 

Ms. WATERS. OK. I am going to move on. 

Mr. Kalman, also in your testimony, you emphasize how criminals can use shell companies to facilitate their illicit activity. How 

would CDD Rule and beneficial ownership legislation help curb the 

flow of illicit funds by criminals, kleptocrats, human traffickers, 

and terrorists? 

For example, in 2013, prosecutors in New York charged 34 alleged members of Russian-American organized crime groups with 

a range of racketeering activities, which includes one group that 

was alleged to have moved millions of dollars in illicit funds to a 

network of shell companies in Cyprus and the United States. 

Would the CDD Rule or beneficial ownership legislation prevent 

this? 

Mr. KALMAN. So in my written testimony, and let me highlight 

it here, I think it is a critically important issue for us to be raising 

here that this is not an administrative exercise, that this impacts 

real issues that threaten the financial system and individuals in 

our society. The issues range from, as you said, national security 

issues, kleptocrats hiding money. We also see it in the opioid epidemic, anonymous shell companies used to move illicit drugs, 

human trafficking examples. We recently had Polaris, one of the 

largest anti-human trafficking organizations join our coalition specifically because law enforcement can’t follow the money. 

There are numerous examples, and the legislation that you have 

cosponsored with Mrs. Maloney would crack down on this, and we 

think it would have a foundational impact on these issues and lead 

law enforcement to better be able to crack down on the wrongdoing. 

Ms. WATERS. I am a bit curious. Cyprus comes up quite often 

when we are talking about shell companies or when we are talking 

about money laundering. Do you have or know or understand information about what is going on with Cyprus and its role in money 

laundering and shell companies? 

Mr. KALMAN. There may be others that—Mr. Greene has more 

information on Cyprus. Let me say one thing that I do think is important because it has come up in numerous conversations, very 

quickly, that the issue is if we close down our system to this money 

laundering, won’t they just go overseas to some of these other jurisdictions, whether it be Cyprus or the Cayman Islands or what have 

you. 

I would like to say that the European Union and many of our 

allies have already moved to collect this information. If we voluntarily choose to move forward and do the same, the remaining nations, I have been told, would follow suit. Right now, those places 

like Cyprus, the Cayman Islands, BVI, what have you, all point to 

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the United States saying why should we do this if the United 

States doesn’t? 

So we do believe that if we take leadership in this, the rest of 

the world will follow and we can actually have a substantial impact 

globally. 

Ms. WATERS. Does anyone else have something quickly to say 

about Cyprus? 

Mr. GREENE. Yes. Thank you, Congresswoman. I would just say 

that I think Cyprus has been an attractive jurisdiction for a variety 

of actors because it is seen as a favorable jurisdiction for offshore 

banking and also one that protects the privacy of companies that 

are established there, sometimes referred to as bank secrecy jurisdictions. I think you can see that sometimes that can go awry, as 

has happened in the recent designation of FBME by FinCEN for 

311 sanctions. 

Ms. WATERS. Thank you. I yield back. 

Chairman LUETKEMEYER. The gentlelady’s time has expired. 

With that, we go to the gentlelady from Utah. Mrs. Love is recognized for 5 minutes. 

Mrs. LOVE. Thank you. Thank you so much for being here today. 

I have heard a little bit of consternation about this rule from the 

banks in my State who don’t think that they are best positioned 

or the best positioned entity to gather this due diligence, and they 

wonder why this due diligence isn’t conducted by the various 

States, corporations, departments which register the business. 

On the other hand, banks have already been forced to develop extensive FinCEN compliance procedures, and this would seem to 

just add new wrinkles to those existing procedures. 

I would like to hear your thoughts on the relative merits of having banks conduct this particular form of due diligence. The burden 

has to fall somewhere, but I guess I am just trying to figure out 

why the banking institution has to be the place where it goes. 

Mr. BAER. Thank you, Congresswoman. The CDD Rule is actually broader than just beneficial ownership. It involves an obligation to know the customer and monitor for suspicious activity, and 

to do that you actually have to know who are you monitoring. 

So the question is when you start with who the beneficial owners 

are, is that something the bank should have to do and each bank 

do potentially for the same customer over time? Or is that something that just should be collected, as the legislation would intend, 

at the outset of the formation of that company? 

I think banks would tell you they are not trying to avoid their 

CDD requirements, but it certainly would be much more efficient 

and probably more accurate if they could just draw on a database, 

I think the draft legislation envisions FinCEN, and just go to that 

database and say, OK, here are the beneficial owners of this company, and that is who I am going to monitor for suspicious activity. 

Mrs. LOVE. Ms. Martinez, what kinds of resources does an institution need to devote to this additional rule, and how does this affect cost to the institutions? 

Ms. MARTINEZ. So I talked about this in my opening statement. 

Just for IBC, we have spent 2,912 hours just designing and testing 

all of our programs and our policies. And it has taken us about 

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7,800 hours to train our employees on this new rule. And this is 

an ongoing effort because there is still not enough clarity. 

Mrs. LOVE. Right. 

Ms. MARTINEZ. I would like to address your point on why the 

burden is on the banks and not on the States. 

I am in Laredo, Texas, which is on the border of the U.S. and 

Mexico. And I will just use Mexico as an example. I am not saying 

or advocating that this is what we should do, but just as an example of what Mexico does. And they have done this for many, many 

years. 

Every state in Mexico is required to register businesses. And financial institutions can rely on that information. And that beneficial ownership information is at 1 percent and above. 

Mrs. LOVE. OK. 

Ms. MARTINEZ. And if there is a change to that company structure, there is a formal Federal process that the company has to go 

to to register those changes. 

Mrs. LOVE. OK. 

Ms. MARTINEZ. So I think we should be partners with the States 

and we shouldn’t bear the entire burden. 

Mrs. LOVE. Instead of trying to do two separate—OK. So what 

areas should FinCEN and the regulators be working on to address 

the—you talked about clear understanding. And that clearly is an 

issue. 

So what do you think the areas should FinCEN focus on so that 

we can address that, first and foremost, because that, I can see already, using resources and trying to figure out what information, 

clear direction on what to do. So— 

Ms. MARTINEZ. I think there are two that come to my mind right 

away. And the first one is this issue with the auto-renewable CDs. 

So if you are a business customer and you bank with four different banks in your city, and you have four different CDs that all 

auto renew at a different time, you are going to be required by your 

financial institution to provide beneficial ownership information 

the first time that that CD renews after May the 1st. So four different beneficial ownership attestations will need to be provided. 

So if you are a larger business and you have four certificates of 

deposit and four checking accounts, and then you have a change to 

your organizational structure, now you have to go to four different 

banks to make those changes. And that is a, I think, a burden on 

our small businesses that are not exempt by this regulation. 

Mrs. LOVE. OK. Thank you. 

And on the flip side, what actions should FinCEN and regulators 

take to ensure financial institutions aren’t overcollecting information? I mean, you are thinking about different information that has 

to happen very quickly. You have different entities. How do we ensure that there is not overcollecting? 

Ms. MARTINEZ. Well, I think that is a very good question, and I 

think we should all ask FinCEN that question. The problem is also 

that not only are all the financial institutions having to collect all 

this information, but it is not going to be used unless we receive 

a subpoena. And there is nothing to verify it against. 

Yes, there is verification for identification of the beneficial owners, but there is no corporate document that banks have to verify 

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the percentage of ownership that the customer is attesting to. So 

how valuable will that information even be to law enforcement? 

Mrs. LOVE. Very insightful. Thank you so much. 

I yield back, Mr. Chairman. 

Chairman LUETKEMEYER. The gentlelady’s time has expired. 

With that, we go to the gentleman from Washington. Mr. Heck, 

you are recognized for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. 

First, I would like to start off by saying in the 5 years and 4 

months I have had the privilege and honor to sit on this committee, 

we have received testimony from an incredible number of interesting stakeholders, ranging from consumers seeking to protect 

consumers to those who are regulated. 

In all that time, Ms. Martinez, I don’t think I have ever seen testimony presented as strong and clear and supported as yours. You 

are a credit to your profession, and I just wanted to thank you for 

that. 

I also want to say that when I talk to bankers back home about 

compliance, and I do all the time, I ask them, what is really frustrating you? What is getting you down? And every single one says 

BSA and AML. Every single one. And I have come to the conclusion, as somebody not from the industry, except I had a cup of coffee in it 40 years ago, that it really is borne of two factors. 

And the first of which seems to be it is a one-way ratchet, and 

it is getting tighter and tighter. Requirements are always getting 

more difficult, and there isn’t any countervailing effort within the 

regulatory context to seek to ease that, it seems to me, or to lighten 

BSA compliance in other ways. 

And second is that it is, as alluded to here earlier, just, frankly, 

not very transparent. 

The bankers in my district, as Ms. Martinez reflects, really believe in the mission of BSA, and nobody doubts that. And they put 

a lot of time and effort into complying with it. Thank you for documenting it again, Ms. Martinez. But they have no idea if they are 

helping. They really don’t. Not a single one of my community bankers, not one, has ever told me that they have received a follow up 

from a law enforcement agency on a SAR or a CTR. Not one. 

So the first problem, I think, about the one-way ratchet is at 

least partially on us. We contribute to this here in this institution, 

unfortunately. We have been ignoring this hue and cry and the recommendations that we back down some. Part of the evidence of 

that, to invoke the 800-pound elephant in this room, is that both 

chambers have passed packages of major regulatory relief. And we 

hear a lot from, back home, about the need to do this. Not one line, 

not one section, not one provision relating to BSA/AML. The number one complaint: Nothing is being done in it. 

And I am not pretending like this is easy. It is a Gordian knot. 

My friend, Mr. Luetkemeyer, has been working on this for a couple 

of years. I know it is hard. 

So the second problem is really what I want to quickly, since I 

have managed to speak for most of my time, get your thoughts on, 

and that is the issue of just how darned effective is the Bank Secrecy Act. How efficient is it? Is anyone reading SARs that are 

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filed? Does anyone review the CTRs, or are they just kept in a 

database to be used if there is a lead that comes up? 

And if nobody is reading them, does it make more sense to just 

have the banks keep it and make it available should somebody 

need it? Or if people are reviewing the reports, for which I haven’t 

received much evidence, indications otherwise, and acting on leads 

that they generate, what can we do to demonstrate to the people 

like Ms. Martinez that all of their time, effort, and money devoted 

to this is actually making a difference? 

That is a big mouthful of questions. Mr. Greene, you win. 1 

minute and 16 seconds. 

Mr. GREENE. Thank you, Congressman. I appreciate the opportunity to answer this question having been inside FinCEN and 

seen the value of SAR reporting. 

I think you touch on an issue that FinCEN, I know during my 

time there, was very concerned about, which was the lack of feedback about the value of SARs and their utility. 

I can tell you from having seen inside of FinCEN, SARs are immensely useful, and so is a lot of the other reporting that is required under the Bank Secrecy Act. 

I was particularly impressed by their use in combating terrorism 

and in informing investigations related to terrorist attacks, both 

abroad and also activities within the United States. And so I think 

they play a critical role. 

But I think that there is some regulatory fatigue that has set in 

among the regulated financial institutions that have to comply with 

the Bank Secrecy Act, and they need to understand the value of 

those SARs, number one. 

So it would be nice to have some method of feedback to industry 

to explain to people when a particular SAR has been useful, that 

would require some collaboration with law enforcement. But more 

broadly, I also think there needs to be some flexibility in the approach to enforcement of the BSA requirements so that we are 

really focusing on enforcing against parts of AML programs that 

really address the particular threats that the country is facing at 

any given moment. 

Thank you. 

Mr. HECK. Thank you sir. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

With that, we go to the gentleman from Texas. Mr. Williams is 

recognized for 5 minutes. 

Mr. WILLIAMS. Thank you, Mr. Chairman. And thank you for 

holding today’s hearing. 

Criminals and other bad actors wishing to do harm to Americans 

have used the U.S. financial system for many years to hide their 

illicit activities. Because of this abuse, it has always been important for financial institutions to remain vigilant, and that is why 

anti-money laundering and counter-terrorist financing regimes are 

so crucial. 

Implementation of the FinCEN Customer Due Diligence Rule is 

rapidly approaching, as we have talked about. And so testimony 

from the various stakeholders and experts before us will be crucial 

in determining whether or not we are on the right track. 

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So the first question to you, Ms. Martinez, and I would like to 

add, you work for a great group of folks. 

Ms. MARTINEZ. Thank you. 

Mr. WILLIAMS. I understand that the bank that you are with devotes a lot of resources to complying with BSA regulations. And as 

one of the key components of BSA compliance is the filing of Suspicious Activity Reports, or SARs, as we have talked about. So how 

does your bank identify potential SARs filings? And further, do you 

find that the information you provide law enforcement is useful to 

them? And do they give you any kind of feedback at all, as we have 

spoken? 

Ms. MARTINEZ. So I have been told that this is my hobby horse, 

so thank you for asking me that question. At the bank, and most 

financial institutions work this way, we have a surveillance system. And this surveillance system is made up of a series of rules 

that have various thresholds on different types of transactions. We 

review hundreds of thousands of alerts on an annual basis. Those 

hundreds of thousands of alerts give us several thousand transactions that we need to investigate. Of those thousands of transactions that we investigate, we end up with a smaller number of 

Suspicious Activity Reports that we file. 

I have been BSA officer at IBC for 27 years. We do at times get 

requests from law enforcement for supplemental information. 

There are law enforcement task forces that look at these SARs, but 

there is no transparency from FinCEN with regards to this data. 

I have no idea, of the thousands of SARs that we filed at IBC, 

how many of those were helpful to law enforcement, what percentage of those SARs were helpful to law enforcement. And I believe 

that FinCEN has a responsibility to give us that transparency. 

We believe in these regulations and we take our corporate responsibility very seriously, but let’s develop rules that make sense 

for all of the stakeholders. 

Mr. WILLIAMS. OK. Again, let’s talk about onboarding process for 

new costumers. 

A 2016 Thomson Reuters survey of companies discussing their 

onboarding process with the bank found that 30 percent of the respondents reported an onboarding time of more than 2 months, and 

10 percent claimed an onboarding time in excess of 4 months. 

So if companies that have to wait that long to do business with 

yours or a similar institution, they may decide to take their business elsewhere. 

So will the CDD Rule increase onboarding times for new customers, and are you at risk of losing customers because of it? 

Ms. MARTINEZ. Yes and yes. And so I spoke about that earlier. 

Rarely is the beneficial owner the one that walks into the bank to 

open the account. It is usually the controlling person. We are now 

required to identify the beneficial owners. The controlling person 

will not have the identification for those beneficial owners. So I anticipate that it is going to be very rare that we are going to be able 

to open an account when that individual actually wants the account open. 

Even today, sometimes it takes months to collect all the corporate documents that we need to collect from customers. And so 

I think it is a very big danger for our small business customers. 

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Mr. WILLIAMS. OK. Mr. Greene, as we all know, the May 11 implementation date of CDD Rule is rapidly approaching, as we have 

talked. And, however, FinCEN earlier this month released an additional set of FAQs to assist institutions in compliance. 

So do the recent FAQs give institutions the needed clarity to 

meet compliance standards, or does FinCEN need to offer technical 

corrections or other changes to the regulation? 

Mr. GREENE. Thank you, Congressman. I think that the FAQs 

take care of a number of the questions and concerns that industry 

had raised during the 2-year period where they had a chance to 

work on implementation to the rule. I do think there are some 

questions that are still outstanding, and I think that that is going 

to require close collaboration with FinCEN to get those questions 

answered, and that FinCEN needs to address those and provide 

extra guidance, where needed, so that institutions can meet their 

obligations. 

I also think that once the May 11 implementation date arrives 

and they go forward into implementation, FinCEN needs to demonstrate some leniency and flexibility with the inevitable issues 

that are going to arise as people start to implement. 

Even if they were to resolve tomorrow all the issues that are 

raised by the FAQs, there are going to be other issues that arise 

as people start to actually implement these rules. And they just 

need to be patient and flexible, as Mr. Kalman had suggested. 

Thank you. 

Mr. WILLIAMS. I yield my time back. I am grateful for y’all’s testimony. Thank you. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

Without objection, the gentleman from New Mexico, Mr. Pearce; 

the gentleman from Arkansas, Mr. Hill, are permitted to participate in today’s subcommittee hearing. While not members of the 

subcommittee, they are members of the full Financial Services 

Committee, and we appreciate their participation today. 

They have just called votes, but I think we can be able to, hopefully, we get both gentlemen in before we need to leave. 

And with that, I will recognize Mr. Pearce from New Mexico, for 

5 minutes. 

Mr. PEARCE. Thank you all. 

And I appreciate your testimony today, Ms. Martinez. You are at 

the intersection of what we are struggling with on this legislation. 

So let’s see if we can lean into the deal here and we will get to you 

there. 

So you talk in section 1, at the end of it, you talk about our helping our law-abiding customers achieve financial success. And believe me, I am on your side in the argument, but I find myself on 

the other side of the policy. And so it is trying to harmonize those 

two positions. 

Because it is exactly that that says that willingness to help our 

law-abiding customers achieve financial success. It says we have to 

do something on beneficial ownership because it is my home county 

where a lot of trucking and the oil field, and people show up with 

a lot of money, they buy brand-new trucks, and they can have new 

trucks all along and so they compete better. They don’t have to 

make a profit. 

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And so what it is doing is actually taking away the possibility 

of the law-abiding companies to make a profit because they can 

price anywhere they want to. Again, they are getting free money 

from drug traffickers somewhere. And so that drives me. 

How do you all evaluate that when you are—I understand the 

core value of helping our law-abiding customers achieve success, 

but if they can’t be successful because the market is rigged by people who have shell companies, how do you just think about that 

particular intersection of the question? 

Ms. MARTINEZ. I think it is very important for us to try to solve 

the root cause of the problem and not the symptoms. 

Mr. PEARCE. What is the root cause? 

Ms. MARTINEZ. The root cause is that beneficial owners should 

be identified at the point of formation. 

I agree with Congresswoman Maloney and what she said earlier, 

why should the burden be at the bank level only. It should be at 

the time that the company is formed. That is the best time for the 

identification of beneficial ownership to be done, and transparency 

to— 

Mr. PEARCE. But you understand—I don’t mean to interrupt, but 

we have a vote coming up. Everybody is trying to get their questions in. 

So you get the beneficial ownership at the time that the company 

is formed and then people trade shares. And so they show up at 

the bank. And even—if I look down in the second point, and you 

are talking about that the control person at the company may not 

know who the beneficial owner is. And to me, that seems like a 

problem that a bank would want to cure. 

If a control person doesn’t know who the beneficial owner is, I 

think that should send off alarm bells. But you presented, and 

again, I am sensitive to your side. Normally I find myself on your 

side of the equation. But we are really struggling because the testimony is that the U.S. has become the haven for shell corporations 

because we are so lax in every regard. And do you feel like the control person should maybe, maybe, know who the beneficial owner 

is before they are allowed to be the control person? 

Ms. MARTINEZ. Yes, I do. And I think all of that should be discussed and entered into record at the time the company is formed. 

Back to the example that I used in Mexico, that is what happens 

at the state level when a company is formed. And if there is a 

change in ownership, that has to be registered at the federal level 

and then it has to be re-registered at the state level, then we can 

rely on that information to be accurate. 

Right now, I am basing what a customer is telling me on their 

attestation. I have nothing to verify that against. 

Mr. PEARCE. So your position is based on the fact that people 

who are willing to sell drugs and create illicit profits are going to 

tell the truth about— 

Ms. MARTINEZ. No, I think— 

Mr. PEARCE. They are going to tell the truth about who the beneficial owner is when they incorporate or when they—maybe they 

just come in to start the bank account and they say—and they are 

going to tell you the truth? 

Ms. MARTINEZ. I think that— 

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Mr. PEARCE. I don’t believe that, but— 

Ms. MARTINEZ. I think that is FinCEN’s position, which is why 

they are allowing for the beneficial ownership at attestation. 

Mr. PEARCE. Know that we in the Counterterrorism and Illicit 

Finance Act, we have a section—I am going to provide that to you 

through the Chairman and all of the people above me in this organization—and I would like your comments. Because we are really 

trying to address the fact that the bankers submit all these reports 

and nobody ever gives them feedback. I think you should actually 

have access to that information. It would allow the process to be 

a little bit more transparent. 

I am going to yield back, Mr. Chairman. I will let somebody else 

get questions. 

Chairman LUETKEMEYER. The gentleman yields back. 

And then we will go to— 

Mr. PEARCE. I appreciate you. Thanks. 

Chairman LUETKEMEYER. With that, we go to the gentleman 

from Arkansas. Mr. Hill is recognized for 5 minutes. 

Mr. HILL. I thank the Chairman. Thanks for letting me come to 

the hearing today. 

I appreciate too, Mr. Chairman, you and Mr. Pearce supporting 

my effort to delay this rule for 1 year. And I will tell you why, very, 

very succinctly. 

One, I don’t think it helps us catch bad guys. Number two, we 

already have a rule in place that, as Ms. Martinez looked at, is 

very hard to comply with. And this is made more difficult. But the 

principal reason I object is, due to Mr. Pearce and Mr. 

Luetkemeyer’s hard work, we are trying to rewrite AML/BSA for 

the first time in a comprehensive way. And it seems to me to introduce a new complex beneficial ownership rule in the midst of trying 

to get it right statutorily is a distraction to the banks, in addition 

to a costly distraction. 

So I would like to know, Ms. Martinez, do you support delaying 

this rule? 

Ms. MARTINEZ. Yes, I do, along with many other bankers. 

Mr. HILL. Yes. And so I want to be clear, though, that I think 

secretaries of State should have best practices where they have an 

active email address, an active phone number, an active name for 

an agent, for every incorporation in the country, absolutely. And 

that they have some requirement in their State that there is a penalty associated with being inaccurate. I think that is good. That is 

not in our Federal jurisdiction, but that is an important thing. 

And then I would like to argue again in front of this panel as 

I have for 2 years now, that we do have accurate beneficial ownership information in this country, at least once a year, when we file 

the tax returns for every one of these pass-through entities. 

And I believe the burden is on the Federal Government and the 

Executive branch to work with the Legislative branch to see how 

best to use that data because it is accurate. They can change ownership during the course of the year, no doubt. But to have a simultaneous knowledge of every time someone changes ownership in a 

company in this country, that isn’t going to happen. That is not 

possible. That is unreasonable. 

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And so this idea that the IRS has pass-through ownership down 

to 0 percent, 25 basis points of a percent. Not 25 percent, it is actually an actual reading of the ownership in every pass-through entity of someone who has formed a company and files a tax return in 

the United States. And that would be a great safe harbor source 

of information for our financial institutions. 

Next thing I would say is I am not a big fan for this data—another infinite database controlled by some unknown entity that 

people just ping into and find out what the beneficial ownership is. 

We have enough trouble with keeping people’s private, personal information safe in this country. The IRS has failed doing it. OPM 

has failed doing it. Equifax can’t do it. Facebook can’t do it. 

So to create another database that people can ping into from remote access on a PC or a bank data processing system, I think 

bears a lot of risk. 

So, Mr. Chairman, I appreciate the work you are doing and that 

Mr. Pearce is doing. We need to design a beneficial ownership rule 

and customer disclosure capability that banks can easily comply 

with, provide the Federal Government the information they need. 

But I argue passionately, the Federal Government has the information we are looking for. Let’s find a legal, constitutional way for 

that information to be shared inside the Federal Government. 

Thank you, Mr. Chairman. I yield back. 

Chairman LUETKEMEYER. I thank the gentleman from Arkansas 

for yielding back, and I appreciate his patience and his suggestion. 

I wholeheartedly agree with it. 

I want to thank the panel for your participation. It has been very 

enlightening. And you guys have done a great job of explaining 

your concerns and your interpretation of the rule and the consequences of it. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

With that, this hearing is adjourned. 

[Whereupon, at 10:52 a.m., the subcommittee was adjourned.] 

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A P P E N D I X 

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Æ 

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