[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]





                  IMPLEMENTATION OF FINCEN'S CUSTOMER  
                DUE DILIGENCE RULE_REGULATOR PERSPECTIVE
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                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON TERRORISM

                          AND ILLICIT FINANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 16, 2018

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-92





[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]






                                   ______
		 
                     U.S. GOVERNMENT PUBLISHING OFFICE 
		 
31-456 PDF                WASHINGTON : 2018                 














                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
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

                     Shannon McGahn, Staff Director
             Subcommittee on Terrorism and Illicit Finance

                   STEVAN PEARCE, New Mexico Chairman

ROBERT PITTENGER, North Carolina,    ED PERLMUTTER, Colorado, Ranking 
    Vice Chairman                        Member
KEITH J. ROTHFUS, Pennsylvania       CAROLYN B. MALONEY, New York
LUKE MESSER, Indiana                 JAMES A. HIMES, Connecticut
SCOTT TIPTON, Colorado               BILL FOSTER, Illinois
ROGER WILLIAMS, Texas                DANIEL T. KILDEE, Michigan
BRUCE POLIQUIN, Maine                JOHN K. DELANEY, Maryland
MIA LOVE, Utah                       KYRSTEN SINEMA, Arizona
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              RUBEN KIHUEN, Nevada
WARREN DAVIDSON, Ohio                STEPHEN F. LYNCH, Massachusetts
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee






















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 16, 2018.................................................     1
Appendix:
    May 16, 2018.................................................    23

                               WITNESSES
                        Wednesday, May 16, 2018

Blanco, Kenneth A., Director, Financial Crimes Enforcement 
  Network........................................................     3

                                APPENDIX

Prepared statements:
    Blanco, Kenneth A............................................    24

              Additional Material Submitted for the Record

Pearce, Hon. Stevan:
    Statement for the record from the Consumer Bankers 
      Association................................................    29
    Statement for the record from the Credit Union National 
      Association................................................    31
    Statement for the record from the Independent Community 
      Bankers of America.........................................    33
Blanco, Kenneth A.:
    Written responses to questions for the record submitted by 
      Representative Budd........................................    35

 
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                        Wednesday, May 16, 2018

                     U.S. House of Representatives,
                                  Subcommittee on Terrorism
                                        and Illicit Finance
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:01 p.m., in 
room 2128, Rayburn House Office Building, Hon. Stevan Pearce 
[chairman of the subcommittee] presiding.
    Present: Representatives Pearce, Pittenger, Rothfus, 
Tipton, Williams, Hill, Emmer, Zeldin, Davidson, Budd, Kustoff, 
Hensarling, Perlmutter, Maloney, Foster, Kildee, Sinema, 
Vargas, Gottheimer, Kihuen, and Lynch.
    Chairman Pearce. The subcommittee will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Members of the full 
committee who are not members of the Subcommittee on Terrorism 
and Illicit Finance may participate in today's hearing, and all 
members will have 5 legislative days within which to submit 
extraneous materials to the Chair for inclusion in the record. 
This hearing is entitled, ``Implementation of FinCEN's Customer 
Due Diligence Rule--Regulator Perspective.''
    I now recognize myself for 3 minutes to give an opening 
statement.
    I want to thank everyone for joining us today. Today's 
hearing will examine the implementation and enforcement of 
FinCEN's (Financial Crimes Enforcement Network) customer due 
diligence (CDD) rule, along with its compliance requirements 
for financial institutions. Last week, the customer due 
diligence rule went into effect, capping a 6-year effort by 
FinCEN to address shortcomings in our anti-money laundering 
(AML) and countering terrorist financing (CTF) regulatory 
regime.
    I want to applaud FinCEN for their work in this area. As 
Chairman of the Terrorism and Illicit Finance Committee, I have 
heard testimony from a variety of experts in the field of 
detecting and pursuing criminals in the financial system. Many 
agree that a critical component of success in these 
investigations is law enforcement's timely access to beneficial 
ownership information of shell corporations being used to 
further criminal endeavors. The CDD rule requires covered 
entities, including banks, brokers, or dealers of securities, 
mutual funds, and futures commission merchants to identify and 
verify any beneficial owner who, directly or indirectly, owns 
25 percent or more of the equity interest in a legal entity, 
along with a single individual who exercises control over the 
legal entity at the time of account opening.
    Although we agree on the importance of this information, 
there are legitimate concerns about the application of this new 
rule and the impact it will have on financial institutions. As 
the GAO reported in February, banks in the southwest border 
regions are derisking specifically because of concerns with BSA 
compliance. Adding additional requirements will likely increase 
this occurrence and cut business off from the financial system. 
Outstanding questions also remain for institutions that are 
working to ensure compliance with the CDD rule, including what 
an appropriate risk-based approach to collection entails. I 
look forward to the Director's opinion on these issues.
    Today's hearing is an opportunity to discuss the 
implementation and enforcement of FinCEN's CDD rule and the 
impact it will have on our financial institutions. I hope our 
members will take this opportunity to learn from our witness 
about the benefits of collecting beneficial ownership 
information and how FinCEN plans to work with bank examiners 
and financial institutions to implement and appropriately 
enforce the CDD rule.
    I would also like to thank Director Blanco for being here 
today. I look forward to his expert testimony.
    The Chair now recognizes Mr. Perlmutter for 2 minutes.
    Mr. Perlmutter. Thanks, Mr. Chair.
    Mr. Blanco, thank you for being here. Thank you for your 
service.
    The lack of transparency in our financial system has 
created an environment where criminals who should be shut out 
of the financial system can use anonymous shell companies to 
launder money, finance terrorism, and engage in other illegal 
activities.
    In the last few years, high-profile leaks, such as the 
Panama Papers and Paradise Papers, have highlighted this tactic 
and the need for Congress and agencies to address beneficial 
ownership and financial transparency. FinCEN's customer due 
diligence rule seeks to take an important step in requiring 
beneficial ownership information and preventing criminals from 
hiding from law enforcement through anonymity. I look forward 
to your testimony on the implementation of this new rule and 
our discussion about how FinCEN and this subcommittee can 
continue to improve our anti-money laundering system and reduce 
illicit finance.
    Obviously, some of the banking institutions that we hear 
from, from time to time feel that this puts a little additional 
burden upon them, and we have had complaints about that. But I 
think, from a law enforcement point of view, the need to know 
who owns a particular entity is very critical, and so we want 
to hear about the benefits and the burdens of this rule.
    And I thank you today in advance for your testimony.
    Chairman Pearce. The Chair now recognizes Mr. Pittenger for 
2 minutes for an opening statement.
    Mr. Pittenger. Thank you, Mr. Chairman and Ranking Member 
Perlmutter, for holding this hearing today.
    I would also like to thank our distinguished panelist, Mr. 
Kenneth Blanco, for his testimony to our subcommittee this 
afternoon.
    As the Director of the Financial Crimes Enforcement 
Network, commonly known as FinCEN, his division is responsible 
for the enforcement of the customer due diligence rule, which 
went into effect May 11th.
    Last month, this committee's Subcommittee on Financial 
Institutions, of which I am also a member, heard from legal and 
issue-area experts on financial institution perspective.
    I am looking forward to Mr. Blanco's testimony on the 
regulatory perspective and hearing his thoughts on how we can 
encourage information sharing while still providing banks 
clarity and not placing additional burdens on their customers.
    Banks value legal compliance, but especially midsize banks 
value their customers' experience. We must ensure FinCEN is 
providing banks with adequate information to ensure their 
compliance, that there is no unintentional noncompliance.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman Pearce. The gentleman yields back.
    Today, we welcome the testimony of Mr. Ken Blanco. He is 
the Director of the Financial Crimes Enforcement Network, 
FinCEN, in the U.S. Department of Treasury. Mr. Blanco joined 
FinCEN in 2017, after serving as the Acting Assistant Attorney 
General of the Criminal Division at the United States 
Department of Justice.
    During his tenure with the Criminal Division, Mr. Blanco 
oversaw a number of its sections, including the Money 
Laundering and Asset Recovery Section, formerly the Asset 
Forfeiture and Money Laundering Section, the Narcotic and 
Dangerous Drug Section, the Organized Crime and Gang Section, 
the Childhood Exploitation Section. Mr. Blanco has supervised 
many of the Criminal Division's most significant national and 
international investigations into illicit finance, money 
laundering, Bank Secrecy Act, and sanctions violations, 
including the investigation of global financial institutions 
and money service businesses.
    Mr. Blanco joined the Department of Justice almost two 
decades ago as an Assistant United States Attorney in the 
Southern District of Florida. Prior to joining the Department 
of Justice, Mr. Blanco began his career at the Miami-Dade State 
Attorney's Office, where he served in various sections, 
including the Organized Crime Section, Public Corruption 
Section, and the Major Narcotics Section. Mr. Blanco earned his 
J.D. from the Georgetown University Law Center, where he also 
currently teaches as an adjunct professor of law.
    You will be recognized now for 5 minutes to give an oral 
presentation of your testimony.
    Without objection, your written statement will be made part 
of the record.
    Mr. Blanco, you are recognized for 5 minutes.

                 STATEMENT OF KENNETH A. BLANCO

    Mr. Blanco. Thank you, Chairman Pearce, Ranking Member 
Perlmutter, and members of the subcommittee. Thank you for 
inviting me to appear today on behalf of the Financial Crimes 
Enforcement Network, FinCEN, to discuss our efforts to 
safeguard our Nation's financial system, by increasing 
transparency through the implementation of our customer due 
diligence, or CDD, rule. I have prepared a written statement 
that I would like to submit for the record, Chairman.
    Prior to my appointment as the eighth Director of FinCEN 
just a few months ago, I had served for almost three decades as 
a prosecutor in both State and Federal offices and, for the 
last decade, at the highest levels of the Department of 
Justice. Over those three decades, I saw firsthand the 
importance and power of our financial system and the need to 
keep it safe and secure.
    I appreciate the opportunity today to discuss how the CDD 
rule and its compliance requirements for financial institutions 
advances our mission of keeping our financial system secure, 
our Nation safe and prosperous, and our communities and 
families safe from harm.
    The reach, speed, and accessibility of the U.S. financial 
system make it attractive to criminals, terrorists, state 
actors, and other bad actors. In response, we have developed 
and rigorously enforce one of the most effective AML/CFT 
regimes in the world. Nevertheless, as strong as our AML/CFT 
framework is, bad actors will continue to exploit its 
vulnerabilities to move their illicit proceeds undetected 
through legitimate financial channels in order to hide, foster, 
and expand the reach of their criminal and terrorist 
activities.
    The misuse of legal entities to disguise illicit activities 
has been a key vulnerability in the U.S. financial system. This 
is not breaking news. Corporate structures have facilitated 
anonymous access to the financial system for criminal 
activities and terrorism. Transnational organized crime 
syndicates, rogue states, human traffickers, terrorists, and 
other bad actors have been able to establish shell companies 
and then open accounts in the names of those companies without 
ever having to reveal who ultimately stands to benefit, masking 
their identities, hiding in the shadows, and making it 
difficult for law enforcement to pursue investigative leads and 
for financial intelligence units like FinCEN to generate those 
leads in the first place, putting our Nation and our people at 
risk.
    An open and transparent financial system in which we can 
identify the transactions and account owners is, therefore, 
essential to disrupting and dismantling criminal and terrorist 
networks that seek to exploit our system and do us harm.
    For these reasons, FinCEN and the Department of Treasury 
have prioritized increasing transparency in corporate formation 
and have strengthened regulatory requirements regarding 
customer due diligence for legal entity customers when they 
open accounts at financial institutions.
    FinCEN finalized a CDD rule on May 11, 2016. The CDD rule 
was the result of extensive and thoughtful engagement with 
industry and with other stakeholders, notice and comment, 
hearings and other discussions over many years about the 
benefits of the rule as well as its potential burdens.
    The CDD rule clarifies and strengthens customer due 
diligence requirements for covered financial institutions by 
streamlining and standardizing existing regulatory requirements 
and adding a new requirement for these financial institutions 
to know and verify the identities of the actual people who own, 
control, and profit from companies, also known as beneficial 
owners.
    The CDD rule advances the purpose of the Bank Secrecy Act 
by making available to law enforcement vulnerable information 
needed to disrupt financial networks and other criminal 
organizations and terrorist networks. This, in turn, increases 
financial transparency and augments the ability of financial 
institutions and law enforcement to identify the assets and 
accounts of criminals and national security threats. It also 
facilitates compliance with sanctions programs and other 
measures to cut off financial flows to these bad actors.
    I understand that this committee has been interested in the 
readiness of both industry and government regarding the CDD 
rule's implementation. To that end, I can report that FinCEN 
has been working collaboratively and regularly in ongoing 
discussions with our regulatory counterparts and industry to 
ensure a common understanding of consistent compliance 
standards within and across regulated industry sectors. This is 
especially important when we issue a new rule. We understand 
and we appreciate that there will be a period of fine-tuning 
for compliance industry, with the examination process itself, 
both of which will take time. And we know that new questions 
often emerge when implementation begins.
    The purpose of the rule is to enhance AML/CFT, not to serve 
as a vehicle to punish financial institutions. We are committed 
to continue working with our partners, agencies, and industry 
to ensure that covered financial institutions are also 
implementing the rule effectively, in a way that makes 
practical sense, and we understand that it won't happen 
overnight. In the meantime, we encourage our financial 
institutions to alert their examiners and us and to share their 
issues and concerns.
    Chairman Pearce, Ranking Member Perlmutter, I look forward 
to answering your questions. Thank you.
    [The prepared statement of Mr. Blanco can be found on page 
24 of the appendix.]
    Chairman Pearce. Thank you, sir.
    I now recognize myself for 5 minutes for questions.
    And so I guess one of the key things is if you have any 
information on the cost-benefit analysis. In other words, there 
are lots of speculation on how much this is going to cost our 
banking system. So do you have that information?
    Mr. Blanco. Chairman, I don't have the specifics as far as 
the numbers. We can get you those numbers with respect to the 
cost-benefit and how much that is going to cost.
    I can just tell you, Chairman, through my experience of 29 
years in law enforcement, the benefits are really important and 
critical to law enforcement, and I think very critical to the 
financial institutions in order for them to be able to do their 
due diligence as we move forward.
    The information, I have only been at FinCEN for 4 months. I 
can tell you the information that we collect from the financial 
institutions and the way we use it is critically important for 
our mission.
    Chairman Pearce. OK. On the southwest where New Mexico 
lies, there are reports of how there is something like 80 
percent of the banks have chosen just to eliminate accounts for 
people who might draw too much attention, so derisking.
    So how do you approach that problem when you are talking 
about this further requirement?
    Mr. Blanco. Chairman, I don't think this further 
requirement is going to exacerbate any of the derisking that is 
happening on the southwest border. What we plan on doing is 
talking with those banks and industry in that area to see if we 
can come up with any solutions to those issues that they are 
seeing.
    I can tell you we have an outreach program at FinCEN that 
is very robust, where, in fact, this morning, I met with the 
Florida Bankers Association. So we are listening to their 
comments and understanding what they have, but I don't think 
that the CDD rule is going to do anything to further what is 
happening on the southwest border.
    Chairman Pearce. Now, there are people that are critics of 
this CDD rule, and then our attempt to quantify in law the same 
concept, who declare that the information is readily available 
right now, that the IRS has the information.
    Did you look at other agencies, other less-intrusive ways 
if this is intrusive? Tell me a little bit about that.
    Mr. Blanco. I can tell you, Chairman, that with respect to 
the information that the IRS receives, that is very different 
information, and the way to get the information is much more 
difficult than what we are proposing.
    Having been on the other side and being a prosecutor trying 
to get that information, you would have to get a court order to 
get the IRS information, first of all, which takes time, and it 
defeats the purpose of your AML risk assessment.
    In addition, the information that is contained in the IRS 
records are very different. It is not as specific as the 
information that we are looking for. It is a little different. 
It doesn't specifically go to equity owners, and it doesn't 
specifically go to what we have as a control prong for 
beneficial owners.
    It is a very different standard, much more simple than what 
we are asking for. It doesn't really get to the point of who 
actually owns and who actually controls the entity that we are 
looking at.
    Chairman Pearce. That question of who actually has the say-
so over the company is one that has drawn questions also. The 
language I think says that anyone who has significant input or 
whatever the language is. How are the banks to interpret who 
actually has that input? What guidance can you give them?
    Mr. Blanco. In the guidance that we have provided through 
the FAQs (frequently asked questions) that we provided, both a 
year ago and just recently, it is pretty clear that somebody 
who has some decisionmaking, whether it is in a control 
position, somebody who has a stake in the corporation as far as 
making decisions, that is really what we are looking for. Who 
maintains the actual control, or do they have a decisionmaking 
process within the company? That is what we are looking at.
    And if you look at the IRS, what they ask for, it is 
somebody who has some responsibility, which is very different, 
and that is more of a mushy standard. We are looking for 
somebody who has control, makes decisions. That is what we are 
looking for.
    Chairman Pearce. Now, there have also been statements that 
this is going to be very onerous to the small businesses. Tell 
me a little bit about what you visualize the form looking like 
that the banks are going to get filled out.
    Mr. Blanco. Chairman, we have a form that is attached to 
our website that they can take a look at. I have a copy of it 
here. We are happy to give you a copy. It really is very 
simple, and it asks for very simple things.
    It asks for, on the customer side, the name, legal entity, 
the address, ZIP Code, the name of the person who is the 
customer. Then it goes into who is the equity owner. Who are 
they? Is there anybody who has 25 percent? If so, you have to 
list who they are: Name, address, social security number if 
that exists, or foreign identification number if that exists as 
well.
    They could also, if they wish, get a copy of the driver's 
license. It doesn't have to be the actual driver's license that 
they have to see; it could be a photocopy. And then it goes 
into the control prong, and that is an individual with 
significant responsibility for managing or directing the 
entity.
    It is a very simple form. They don't have to use this form. 
Banks can use their own form, consistent with whatever software 
or products that they are using, as long as it has that 
information in it, four or five key points. That is all we are 
looking for. It is very simple.
    Chairman Pearce. My time has expired.
    I would recognize the gentleman from Colorado, Mr. 
Perlmutter, for 5 minutes.
    Mr. Perlmutter. Thanks, Director.
    And I like terms like ``mushy,'' so we will get to the 
mushy in a second. But, the debate for us is whether it is most 
of lower Manhattan coming down or the Murrah Building in 
Oklahoma City or some terrible act. We want to try to stop 
those things. And so the cost of those are enormous, if 
calculable at all. The costs of the compliance certainly are 
there.
    Between the chairman, Mrs. Maloney, Mr. Hill, we have 
talked about secretaries of State. We have talked about the 
IRS. We have talked about the lawyers. We have talked about the 
bankers. Somebody has some responsibility to help you, as the 
head of FinCEN and the FBI and elsewhere, have good information 
that stops some terrible act that harms Americans.
    So let's just go back to basics. How prolific, how often, 
in your experience as a law enforcement agent, have you seen 
shell companies come into play to hide bad actors?
    Mr. Blanco. All the time.
    Mr. Perlmutter. So explain that.
    Mr. Blanco. It is not a secret, it really isn't. Even when 
I was a young prosecutor at the State's attorneys' offices and 
we were doing financial crimes, people would hide behind shell 
corporations all the time. Yes, eventually you might find out 
who owns it, maybe.
    That time expended in trying to figure that out and the 
hoops that you have to jump through, by that time those 
criminals have already left and gone and either defrauded the 
elderly person who they were defrauding or committed whatever 
act they are going to commit, transferred the drug money if 
they had it to transfer drug money, or took their human 
traffickers and already sold them into human trafficking. They 
are done.
    What this does for us is, even if the information that is 
provided to us is false--let's just assume that, because I have 
heard that. People say, ``Well, Ken, how are you going to get 
them to provide you truthful information? The fact that they 
are providing false information to us is a key indicator of who 
you are dealing with at that point. And it gives you a lead of 
how you should be investigating these people, and it is a red 
flag.
    But let's just assume the information is correct, which I 
think much of it will be. It gives you leads. The time you are 
saving in doing your investigation is exponential. For example, 
a terrorist act, and many of you may understand this, we have a 
group that responds 24/7. They come into the FinCEN office. We 
run names. We run numbers. We run phone numbers. We run 
corporations.
    Without the beneficial ownership information, it takes a 
lot more time. With that information, both at the time of the 
account being opened and, frankly, at the time the business is 
incorporated, it is going to be critical for us to respond. It 
is about stopping acts before they happen. And this critical 
information, which is very simple information, it really is, we 
are not asking for a lot here, very simple information that 
gives us a heads-up what is going on.
    And the--I am sorry; I am talking a lot.
    Mr. Perlmutter. So my question was: You talked about at the 
formation of the company. How often do you update this through 
your particular rule? Is it every month? Is it upon a loan 
renewal? Is it a change of somebody who signs the credit card? 
What is it?
    Mr. Blanco. So those are triggering events that would cause 
you then to update it. And that is, we have been having a lot 
of conversation with both industry, and we have been having a 
lot of conversation with law enforcement. And the way that we 
have left it with industry and law enforcement is that, through 
your normal AML program, whatever AML program you have, if you 
notice that there has been a change event, a triggering event, 
that is when you update it.
    Triggering events could be all kinds of things. They could 
be an extensive money flow that all of a sudden appears in the 
bank account. That gives you indication something is different. 
A change in ownership, different name being used, a different 
account being opened, all those things that are common sense 
would cause us to update the beneficial ownership information.
    Mr. Perlmutter. So just if I were the banker at that point 
and there is a new signer on the account, a signatory on the 
account, is that a triggering event? The question I have--and I 
think you are on the right track. I am not fighting with you on 
this.
    And you used the word ``fine-tuning,'' and that is what 
this is going to be, but, if I am that banker, every time that 
customer walks in the bank, is that a triggering event? And how 
often are you expecting stuff from these guys? Because it 
sounds like a lot.
    Mr. Blanco. Not every time a customer walks in the bank, I 
don't think that is a triggering event. But let's just say 
there is a new signatory on the account. Yes, I think that is a 
triggering event. That is a changed circumstance that you are 
going to want to take a look into, and you may want to verify 
the beneficial ownership information.
    And in our FAQs, we also said, look, you can also just 
update the information as long as you get an oral or verbal 
confirmation that the information is still correct except there 
is a different signator or a change event. It doesn't have to 
be a drastic event.
    We are not looking for things that are very rogue. We just 
want people to think. What would cause them to want to update 
the beneficial ownership information? What makes sense? What is 
the triggering event?
    Like you said, we are going to be working through this with 
industry and with law enforcement. We are not using this as a 
hammer on anybody. It is not a gotcha game. What we are trying 
to do is make sure that we have the right information.
    Mr. Perlmutter. Thank you, and my time has expired.
    Chairman Pearce. The gentleman's time has expired.
    The Chair would now recognize Mr. Pittenger for 5 minutes. 
And be advised that we just had a vote call. There are 14 
minutes left in that. So we will take probably two more rounds 
of questions: Mr. Pittenger, and Mrs. Maloney I think would be 
the next. So we will try to get those in. Then we will take a 
recess for votes and return to the hearing.
    So, Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Thank you again, Mr. Blanco. It seems to me that the new 
CDD rule makes financial institutions weigh convenience and 
customer experience against cost of compliance. Do you think 
that is an accurate assessment?
    Mr. Blanco. I am sorry, sir. I--
    Mr. Pittenger. It makes the financial institutions weigh 
convenience and customer experience against cost of compliance. 
Do you believe that is a valid and accurate assessment?
    Mr. Blanco. Yes, one could assume that is a valid 
assessment. I think here, though, when we talk about cost 
weighed against a secure financial system, I am not so sure we 
are talking about cost.
    I think what we are talking about is the financial system 
that is safe and secure, that everybody can benefit from, 
including the banks and including the customer. And the 
customer too also wants a secure financial system so that they 
can put their money in a place where they can invest and make 
sure that it is safe and secure.
    So I know we talk a lot about costs, but I can just tell 
you what we are asking for is something very simple. I cannot 
imagine it costing too much.
    Mr. Pittenger. Yes, sir. Do you think, with that in mind, 
that some institutions will opt to derisk some customers due to 
the difficulty in understanding the CDD rule or complying with 
it?
    Mr. Blanco. I hope that does not happen. We are going to 
look for that. We take derisking very seriously. We believe 
people should have access to capital and access to the banking 
system, and we want to make sure that happens. May it happen? 
It might. And those are things that we are going to take a look 
at and make sure that those things do not happen for the wrong 
reasons. They may derisk them for other reasons, but we want to 
make sure it isn't because of this.
    Mr. Pittenger. Sure. Mr. Blanco, it is my understanding 
that the CDD rule will only apply to new accounts opened after 
the effective date.
    Mr. Blanco. That is correct.
    Mr. Pittenger. If that is true, what happens to a financial 
institution if they fail to meet the new CDD rule requirements?
    Mr. Blanco. So we have spoken with our regulators, and we 
have spoken with institutions, our financial institutions, and 
we know there is going to be this time period where everybody 
is adjusting to it. And all we are asking for is that they have 
a good faith effort to comply with it.
    We are not using it to ding anybody. We will work with 
them. We have fielded hundreds of questions since this came out 
in 2016, actually thousands of questions, and we are going to 
continue to do that. It is not a gotcha game.
    Mr. Pittenger. Yes, sir. With that in mind, would a 
financial institution be restricted with their customer 
accounts across the entire customer relationship or solely with 
respect to the new accounts opened after the implementation 
date?
    Mr. Blanco. I am sorry, sir. I am having trouble 
understanding.
    Mr. Pittenger. I understand. Would a financial institution 
be restricted with their customer accounts across their entire 
customer relationship or solely with respect to the new 
accounts opened after the implementation date?
    Mr. Blanco. If I understand your question correctly, you 
are talking about a customer across their entire relationship 
with the bank.
    Mr. Pittenger. Versus new accounts opened.
    Mr. Blanco. Once they start opening new accounts--and 
remember, what we are talking about here are legal entities 
that are opening new accounts.
    What the financial institution will have to do is make sure 
that it corresponds correctly with the other information that 
they have on other accounts, yes.
    Mr. Pittenger. FinCEN released two sets of FAQs--one in 
2016 and then one in the final days before implementation--to 
help bring clarity to the CDD ruling. However, these FAQs do 
not specify the extent to which a financial institution should 
integrate technology changes to the better use of information 
it obtains through CDD.
    Is there any clear guidance on what to do with the 
information once it is gathered and how it should be used to 
enhance AML programs?
    Mr. Blanco. We can provide better guidance, Congressman. 
But I believe, in the FAQs themselves, they talk about where 
the information should be stored and how it should be used in 
the regular course of their AML/CFT risk assessment. That is 
something that they can use in the normal course of how they 
review their risk with respect to that one client.
    Mr. Pittenger. Then how would or should the information 
then be integrated into the transaction, monitoring, or 
sanctions compliance programs?
    Mr. Blanco. In the normal course, each of the institutions 
has their own procedures and policies that they use, and it 
should just be done with their normal policies.
    Mr. Pittenger. Thank you. I yield back.
    Chairman Pearce. The gentleman yields back.
    The Chair will now recognize the gentlelady from New York, 
Mrs. Maloney, for 5 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman and Mr. Ranking 
Member, for calling this hearing.
    And thank you, Director Blanco. I have had a bill in on 
beneficial ownership at the request of law enforcement for 
quite some time. And I think that the customer due diligence 
rule is a huge step forward. I support it, but I also believe 
that the responsibility shouldn't be entirely on financial 
institutions. Banks should know their customers, but it 
shouldn't be this hard to figure out who their customers really 
are.
    And law enforcement and banks have expressed to me that 
they are unable to figure out who these people are. That is why 
I have introduced a bill, the Corporate Transparency Act, that 
would require companies to disclose their beneficial owners at 
the time they are formed, and then financial institutions would 
have access--and law enforcement--to that beneficial ownership 
information, so that they can assure themselves that these 
companies that open accounts with them are not money 
launderers, sex traffickers, or other types of criminals. Under 
my bill, FinCEN would be in charge of collecting this 
beneficial ownership information.
    And in your view, should companies be required to disclose 
their beneficial owners at the time they are formed?
    Mr. Blanco. Yes.
    Mrs. Maloney. And is FinCEN capable of maintaining a 
database of beneficial ownership information that would be 
available to law enforcement and financial institutions?
    Mr. Blanco. Congresswoman, if that is what ultimately 
happens, we have to keep in mind that we are going to have to 
be well resourced in order to do it. If you are asking me today 
if we are well resourced to do it, I would tell you it would be 
very difficult for us to pull that off.
    If, in fact, the ultimate decision is going to be to have 
FinCEN house it, then we are going to have to be resourced to 
do it, but we can do it.
    Mrs. Maloney. Great. Do you think that a bill that would 
have FinCEN collecting beneficial ownership information and 
then allowing financial institutions to access that information 
from FinCEN would complement your customer due diligence rule?
    Mr. Blanco. I do.
    Mrs. Maloney. Great. And in 2016, FinCEN issued two 
geographical targeting orders (GTOs) covering Manhattan and 
Miami that required title insurers to collect beneficial 
ownership information for any legal entity making all-cash real 
estate transactions. And the findings from the first 6 months 
were just shocking. FinCEN found that about 30 percent of the 
transactions reported involved a beneficial owner or purchaser 
that had previously been the subject of a suspicious activity 
report (SAR), which is a shockingly high number and strongly 
suggests that criminals and other bad actors are using 
anonymous shell companies to launder money.
    FinCEN's GTOs were then extended last year and also 
expanded to include L.A., San Francisco, San Diego, and San 
Antonio.
    So I have two quick questions: First, has the beneficial 
ownership information that you have collected after you renewed 
the program continued to be useful for FinCEN? Second, doesn't 
this suggest that one of the keys to cracking down on money 
laundering and terrorist financing, which is a top concern of 
New York, the city I represent, is requiring companies to 
disclose their beneficial owners at least to law enforcement?
    Mr. Blanco. The answer is yes to both.
    Mrs. Maloney. OK. Thank you very much, and I hope we didn't 
miss our votes. We have to run. Thank you.
    Thank you, Mr. Chairman.
    Chairman Pearce. We have 6 minutes left. So the Chair now 
places the committee in recess until after the votes.
    [Recess.]
    Chairman Pearce. The subcommittee will come to order.
    We have a couple of members coming in for questions.
    Until then, I would recognize myself.
    So you talked about implications for bankers and that we 
are there to work together; you are just not after gotchas. 
What about the people who are filling out the forms, if they 
fill them out incorrectly on purpose? Tell me a little bit 
about the consequences.
    Mr. Blanco. That is a very good question, Congressman. That 
actually was a question that I asked myself. Of course, being a 
prosecutor, I want to know what the consequences are.
    Right now, the consequences are there are no penalty 
provisions to the false information given. However, I think it 
really depends on what they say. They could be prosecuted for 
bank fraud, depending on what information they choose to lie 
about, and the consequences to the bank in which lying it. But 
right now the consequences are that they will be investigated 
probably, but there is no crime with respect to that, at least 
that I know of, no penalty provision with respect to the CDD 
rule.
    Chairman Pearce. So how do they come to the attention, how 
do we know that the banks are not gathering the latest 
information and that people are submitting bad or improper 
information?
    Mr. Blanco. I think two ways, Chairman. One way would be 
that the banks, through their normal due diligence, would 
discover that this information is false information.
    It could be that the bank person who is actually doing the 
intake of the information will recognize the red flags.
    And I think the third way to do it is that law enforcement 
themselves, when they run these names, realize that the 
information is incorrect. And right there, that is a red flag 
that perhaps this legal entity should be looked at or the 
individual opening the legal entity, the customer himself or 
herself should be looked at.
    Chairman Pearce. I would recognize the gentleman from 
Nevada, Mr. Gottheimer, for 5 minutes.
    I would then recognize the gentleman from Ohio, Mr. 
Davidson, for 5 minutes.
    Mr. Davidson. Thank you, Chairman.
    And I really appreciate your testimony today, Director, and 
I appreciate the opportunity to talk about some of the 
rulemaking there. A number of issues have been raised as banks 
have attempted to come into compliance with the consumer due 
diligence rule. And the frequently asked questions, that have 
been issued by FinCEN aiming to clarify the rule, have in some 
cases had the reverse effect of complicating and confusing its 
requirements.
    For example, who should actually be listed as the 
beneficial owners that a bank might need to report. It is very 
clear when you say 25 percent or greater, but when, for 
example, significant influence. And from your previous 
testimony, perhaps every time a company updates their org 
chart, there might be a trigger to say, ``Gee, we just hired a 
new plant manager at one of our facilities; do we have to 
update our org chart with FinCEN?'' And then the premise is, 
that all the small businesses in America, many of the smallest, 
least sophisticated businesses of America are criminals if they 
don't keep these forms updated. So it seems the burden is 
heavily shifted to law-abiding citizens to somehow keep the 
government apprised of their privately held business, instead 
of on this organization that we created and asked you to lead 
to do the work to find this information out.
    I guess, do you believe that some of the same, perhaps even 
some complicating factors may arise in terms of how beneficial 
owners should be reported? Do you think about the kinds of 
businesses that you are asking to comply with this admittedly 
simple-to-use form, but at what level in the org chart do I say 
this person isn't exercising significant influence over my 
business?
    Mr. Blanco. Congressman, what the form asks for is just one 
individual if we are talking about a control prong. We are only 
asking for one person. We are not asking for a litany of people 
who may have responsibility or control over the legal--
    Mr. Davidson. You just need the CEO?
    Mr. Blanco. You could. You could put the CEO. You could put 
the controller. You could put a senior manager. It has to have 
somebody who has decisionmaking and that is responsible for 
making decisions.
    Mr. Davidson. You just need a name. You don't need all the 
names; you just need a name.
    Mr. Blanco. You do not need all the names.
    Mr. Davidson. OK. So the other complicating factor is there 
are a number of folks that will have issues with the shift in 
bases, which is the default is, if a newly created business is 
established, the government collects a fair bit of information. 
And they don't necessarily collect all this in a way that would 
make it easy for FinCEN to access, but in a lot of ways it 
seems that it would be easier for us to lower the threshold for 
you to obtain this information than to criminalize every 
business in America unless they fill out this admittedly easy-
to-fill-out form.
    Mr. Blanco. Congressman, we are not criminalizing these 
individuals. People are going to make mistakes. We get that. 
The question is, are they intentionally falsifying documents to 
avoid actually listing who the beneficial owners are?
    Mr. Davidson. I understand. And the basis there is to say 
that you are going to focus on a certain number of companies. 
You are not focused on every small business in America, yet you 
make every small business in America fill out the forms. That 
is the gap.
    So you are heavily focusing on financial institutions, it 
seems, and they are charged with enforcing the rule. Do you 
believe FinCEN has the technical expertise and capacity to 
properly enforce the CDD regime being applied to small 
businesses which have never heard of this CDD rule? Or FinCEN, 
for that matter.
    Mr. Blanco. I am with you on that, Congressman. I think we 
can. I think we do have the tools to enforce it. And I think we 
are doing a great job of doing outreach also to these small 
institutions and other institutions who are covered by this 
rule. We are going to do a better job of doing it. We are out 
there speaking. This whole hearing, I am sure many of them are 
going to be interested in watching it as well. So we are going 
to get out there and make sure that there is--
    Mr. Davidson. Do you believe the IRS already has enough 
information or any other part of the government would already 
have enough information if you could just ask them?
    Mr. Blanco. No. We wouldn't be doing the CDD rule if we 
thought that.
    Mr. Davidson. I guess we can disagree on that.
    And I think the last thing is just a specific one on CDs. 
Every time a certificate of deposit changes, you roll it over. 
You might hold it with a bank. It is the same thing. So you 
might have, every 90 days, you are updating a certificate of 
deposit. It seems like a pretty heavy burden on banks. You are 
confident you have the rule right on that?
    Mr. Blanco. In fact, today, we are issuing exemptive 
temporary relief on instruments just like the CDs that roll 
over. We are going to spend more time thinking about them and 
what we need to do. And these are for CDs that preexist the 
implementation of the rule on May 11th.
    Looking into the future, these CD rules, as long as the 
information doesn't change--and we leave that for the banks to 
tell the customers and the customers must agree: If any of the 
information on your beneficial ownership changes, you must 
notify us.
    So I don't see that that is going to be too much of a 
burden moving forward. As you will see today on our website, 
and we have noticed it today, that we are issuing temporary 
exemptive relief on those that preexist the date of the 
implementation.
    Mr. Davidson. I think that you feel too much immunity from 
the regulatory impact that is being inflicted on America's 
economy and America's small businesses.
    With that, my time has expired, and I yield, Chairman.
    Chairman Pearce. The gentleman's time has expired.
    The Chair now recognizes Mr. Lynch for 5 minutes.
    Mr. Lynch. Thank you very much, Mr. Chairman. Thank you for 
your work on this committee.
    And thank you, Mr. Blanco, and congratulations. I haven't 
seen you since you received your promotion.
    Mr. Blanco. Thank you.
    Mr. Lynch. I am a big fan of FinCEN, and I am a frequent 
flier to FinCEN's offices and a frequent advocate for more 
funding for the work that you do and your folks do within 
Treasury, although I know there are a lot of competing claims 
within Treasury for those resources.
    Mr. Blanco. There are.
    Mr. Lynch. So I try not to cause too much trouble there.
    Mr. Blanco. Thank you for your support.
    Mr. Lynch. But suffice it to say we work with your folks 
regularly. Everybody up on the committee does, and we really 
appreciate the work that you do, and we understand the 
relevancy of all the work you are doing.
    So among the key findings that FATF had back in 2016, the 
Financial Action Task Force, they evaluated our AML, anti-money 
laundering protocols, and counterterrorism, counterfinancing 
terrorism protocols. And they said that one of the chief 
weaknesses was, and I will quote them, ``lack of timely access 
to adequate, accurate, and current beneficial ownership 
information that created fundamental gaps in the U.S. 
context.''
    So the new implementation of Customer Due Diligence 
requirements, do you think that will be enough to address the 
weaknesses that they have identified in our system?
    Mr. Blanco. I think it is one step in identifying the 
weakness. I think there is another weakness, as most of you 
know and talk about, and that is beneficial ownership 
information at the point of opening a corporation, of starting 
the legal entity itself. That is going to be critical for us to 
know and to understand and to use.
    Mr. Lynch. Right. The other piece that we are working on 
quite a bit--the chairman has put a lot of focus on this--is 
cybersecurity within the financial sector. And I have been 
thinking this through to try to figure out a way that we might 
get the financial services industry to more robustly police 
themselves. They are always complaining about overregulation. 
If we can get them in as a partner, a willing partner, then it 
might be a better result.
    But one of the things I have been considering is draft 
legislation to establish a financial sector cyber stress test 
council. This is unlike the other stress test, which is 
governed by FSOC, an external regulator. It would really be 
industry-driven, but we would obviously see what they are 
doing. But require them to periodically upgrade their system so 
that it seems, as the hackers evolve, they find these 
weaknesses in our system. And we don't regularly update, so we 
are having these repeated failures.
    Would something like that help you, in terms of 
establishing a standard out there and a level of accountability 
that requires continual upgrade periodically? Because that is 
what the hackers are doing. They are plus-upping their methods, 
and they seem to be able to find that weak link.
    Mr. Blanco. One of the priorities I have here at FinCEN--
and I think I might have spoken to you about this--is 
cybersecurity and cybercrime, and I think it is going to be 
really important for us to get a handle on that, moving 
forward. And to your point, it does. It evolves. There has to 
be a constant effort to renew what resources we are looking at, 
what technology we have, to move ahead of the game.
    In fact, I have put somebody in my front office that has 
been charged with innovation development and tactical 
development moving forward for FinCEN to look at issues just 
like that.
    Happy to work with your staff on anything that you are 
proposing. Happy to have that discussion about it. I can tell 
you that we work regularly with industry about this technology. 
We were just on the West Coast talking to some of the virtual 
currency exchangers about this technology and how we move 
forward and the attacks that cyber hackers are doing on 
information that we have, but in general the financial system.
    Mr. Lynch. So I will work with my Republican colleagues to 
see if we can come up with something that is suitable to both 
sides, and also reach out to you and to the industry to see if 
we can come up with something that is a consensus approach to 
this rather than have people have to amend it later on.
    Mr. Blanco. Happy to talk to you about it.
    Mr. Lynch. Thanks for your great work.
    And thank you, Mr. Chairman. I yield back.
    Chairman Pearce. The gentleman yields back.
    The Chair now recognizes Mr. Budd for 5 minutes.
    Mr. Budd. Thank you, Mr. Chairman.
    And thank you, Director Blanco, for joining us today. I 
appreciate that.
    I want to talk this afternoon about the lack of clarity 
surrounding compliance requirements under the CDD rule. 
Financial institutions back home are still not entirely sure 
what they could potentially be held liable for. In the latest 
FAQs on the rule released by FinCEN, while it is helpful, it 
still highlighted some issues that need to be addressed.
    First, I am curious, in developing the FAQs that were 
published on April 3rd, was there any discussion with industry 
representatives to understand the potential impact? And let me 
give you an example. Question 12 treats the renewal of a CD or 
a loan as a new account, which is inconsistent with the 
industry's approach. So was there any discussion with industry 
on that?
    Mr. Blanco. Lots of discussion, Congressman. In fact, today 
I issued temporary exemptive relief on that one issue so that 
we can have further discussion on it. We have given industry 90 
days, exempting them from having to comply with it, so we can 
better understand the rule. They have a very sympathetic ear in 
me with respect to that, and we will take a look at it. I will 
make a decision whether or not we provide permanent exemptive 
relief moving forward.
    But we have had--I have to tell you, Congressman, one of 
the things--and look, I have only been in this job for 4 
months, but I have to credit our FinCEN staff who, since 2012, 
has really been talking to industry about this and learning 
from them.
    And we have taken what we have learned, and you will see we 
have done seven or eight different tweaks to the rule. We 
provided several exemptive reliefs, not only in premium 
financing but also on the rollover, automatic rollover accounts 
for preexisting accounts.
    So we are listening. And I think that they should be happy 
about the fact that we are engaging with them regularly.
    Mr. Budd. I appreciate your ear toward industry on that. I 
want to continue.
    The FinCEN FAQs as well as the FFIEC manual update, it 
stated that banks still must update beneficial ownership 
details when opening multiple accounts. So what is this bank 
supposed to do if a customer doesn't respond to calls or emails 
or letters to confirm that their information hasn't changed?
    Mr. Blanco. So I think that really goes to the bank's risk 
assessment and how they use their protocols to make that 
determination. I can tell you, Congressman, that what we have 
done, both with our Federal regulators and also industry, is we 
discuss with them that any time a new rule like this one is 
being issued, there is going to be this time period where we 
are going to take a look and give people the ability to 
implement it without coming and saying, you didn't do this or 
you didn't close that account. There is this timeframe where 
things need to be worked out, both in the regulatory side and 
in the implementation side. We are very mindful of that.
    But in the instance that you just talked about, I have to 
tell you it certainly is wondering if I am the banker, why you 
are not getting back to me. And they have a better risk 
assessment of their client than I would, and I think the 
regulators will take that into account.
    Mr. Budd. I appreciate your thoughts on that. And so do you 
expect banks to follow the FinCEN FAQs as if they equate to 
regulations or, rather, if it was formal guidance, even though 
they were released without industry feedback and a comment 
period?
    Mr. Blanco. Actually, they were released with industry 
feedback. One thing about the FAQs which is really 
interesting--
    Mr. Budd. Sorry to interrupt. Also, did it have a comment 
period?
    Mr. Blanco. It didn't have a comment period.
    Mr. Budd. Did not have a comment period?
    Mr. Blanco. Not with the FAQs, but the rule certainly had a 
comment period that lasted for quite a while. If I am not 
mistaken I think it lasted for 2 years or more, correct?
    But the FAQs, one interesting thing about the FAQs is 
before we issue FAQs, there is a lot of discussion with 
industry and with law enforcement and with other individual 
stakeholders before those FAQs come out.
    So it isn't as though industry is seeing those FAQs the day 
we publish them. Some of them are, but, for the most part, many 
of them have had discussions in panels, in hearings, in 
conversations with us, through our call-in line. We have a 
call-in line where people can ask questions about the rule.
    So a lot of this has already been hammered out before those 
FAQs have even come out. And these tricky issues, the FAQ 
answers the tricky ones. So you are talking about the ones that 
are the most difficult for industry and, frankly, for 
regulators too, to understand as we implement the new rule. And 
we are working with industry to make sure that we do it right.
    Mr. Budd. Thank you very much.
    In the time remaining, one question: Finally, is FinCEN 
concerned that banks might close accounts if they can't collect 
the information, particularly since that would cause FinCEN and 
law enforcement to lose that information?
    Mr. Blanco. That certainly, Congressman, is something that 
we are going to look at and make sure that, if there is a trend 
in that way, we will certainly look into it and see why it is 
happening and what we can do about it.
    You are right: We end up losing valuable information. Also, 
people end up losing access to capital, which is not what we 
want either. So we will be monitoring that.
    Mr. Budd. Thanks for your time, Director.
    Chairman, I yield back.
    Chairman Pearce. The gentleman yields back.
    The Chair now recognizes Mr. Hill for 5 minutes.
    Mr. Hill. Thank you, Chairman. Thanks for holding this 
hearing.
    Mr. Blanco, glad to have you with us today. Thanks for your 
work on behalf of law enforcement.
    I read in the CDD discussion that the annual cost had a 
range that you all have assessed up to around $280 million on 
the high end.
    How many SARs that FinCEN receives every year would be 
directly related to a shell company report from a financial 
institution? Would you just hazard a guess?
    Mr. Blanco. I think I would probably guess incorrectly. 
Given my background, I would say a lot, but I don't want to 
give you the wrong figure. We are happy to get back to you.
    Mr. Hill. Yes, if you would get back to me on that. So I 
know you report the total number of SARs, but if you would tell 
me how many SARs relate directly to a bank reporting to you 
about a concern over a, quote, ``shell company,'' however the 
bank defines shell company.
    Mr. Blanco. Yes.
    Mr. Hill. From criminal indictments that you have brought 
in this arena, how many would turn on a shell company? And how 
much money have you recovered from indictments that are 
connected directly to a shell company?
    Mr. Blanco. So I can tell you, with respect to 
investigations that we have done, if they are sophisticated 
investigations, multimillion dollar, whether they are fraud 
investigations--so we are not just talking about drug 
trafficking and human tracking or terrorism. We are talking--
    Mr. Hill. But they meet the definition of FinCEN.
    Mr. Blanco. Right. We are talking about fraud of elderly. 
We are talking about really significant things that affect 
people. Almost in every one of those very sophisticated cases, 
you are going to have a shell company someplace involved 
because that is the way they are laundering their money, and 
that is the way they are moving their money, and that is the 
way they hide what they do. And you don't have to go too far to 
see those kinds of cases. So it depends on the level.
    Mr. Hill. Do you think the banks are doing a bad job 
collecting that information and reporting it since the Know 
Your Customer rules were put in place?
    Mr. Blanco. Can I just tell you I think the banks are doing 
a great job. I think they are doing their best, and I think 
they want to do even more and even better. So I wouldn't say 
they are doing a bad job.
    I think what we need to do is what we are doing here today: 
Having hearings like this, inviting industry, having the 
conversation, giving them priorities. These are our priorities, 
banks, and this is what we are looking at, together with law 
enforcement. I think that would better help the banks.
    Mr. Hill. When I think of a tax haven, when I say the word 
``tax haven,'' what pops in your head? Name a country.
    Mr. Blanco. Congressman, I can't go there. That--
    Mr. Hill. Is Panama a tax haven?
    Mr. Blanco. The obvious ones. I have done a lot of work in 
Panama, and I have done great work with their government. And I 
enjoy working with them, and they are dedicated public servants 
just like we are. So I wouldn't identify--
    Mr. Hill. So would this sentence in the memo that we were 
given be hyperbole where it says that the United States risks 
being labeled as a money laundering, tax avoidance, and terror 
financing haven? Would you say that is hyperbole?
    Mr. Blanco. I think there may be some countries that would 
say that, but I think that is hyperbole. But--
    Mr. Hill. Yes. The Financial Action Task Force said it. So 
I find that shocking that an organization that we support would 
say that.
    Mr. Blanco. One thing, Congressman--
    Mr. Hill. Let me keep going. I have limited time. Sorry.
    Has Congress asked or has the Treasury Department asked 
States for changes in State law that would be best practices 
for secretaries of State that they capture name, email address, 
address, all the data that you are looking for, for all company 
formations by State and make that available online and that it 
also contain some State penalty for nonaccuracy or not being 
updated? Have you ever called for that, or, to your knowledge, 
has Congress ever asked the States to do that in model 
legislation?
    Mr. Blanco. Not in my recollection. They may have. I 
wouldn't know.
    Mr. Hill. Would you support that? Would Treasury support 
that if the States said a telephone number, email address, 
address, and contact person is just a best practice that was 
required under their State law?
    Mr. Blanco. The devil is always in the details in how it 
works out. I think it is something that we can certainly think 
about and discuss. I think it is always great to have the 
States involved at the corporate formation level, but we can't 
make them do it.
    Mr. Hill. Yes. So Mr. Davidson asked you a question about 
access to information you have or could have under a criminal 
investigation. So the SS-4 taxpayer ID number form that the IRS 
has and the annual tax reform data, including ownership, is 
that data that would be helpful to you in searching for shell 
company beneficial owners?
    Mr. Blanco. Honestly, Congressman, no. It is different 
information.
    Mr. Hill. Why?
    Mr. Blanco. Because what they are asking for is something 
very different. And if you look at their definition of it--
first of all, two things: One is getting the information is 
very difficult because you need to get a court order. And 
having done that and spent months trying to get one, that 
defeats the whole AML purpose. But if you look at the 
definition of what they are asking for when they talk about 
responsible party, they are not talking about an equity party. 
They are not talking about somebody who would benefit from that 
legal entity and what they are doing.
    They are asking for a responsible person. A responsible 
person could be--I am sure the IRS has their own definition of 
what a responsible person is, but it is not what we are looking 
for. We are looking for somebody who is making decisions, who 
has some interest in the corporation, both either on the equity 
side or the control side.
    Mr. Hill. My time has expired, Mr. Chairman. Thank you.
    Chairman Pearce. The gentleman's time has expired. The 
Chair would now recognize Mr. Tipton for 5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman. Appreciate your 
holding this hearing.
    Mr. Blanco, thank you for taking the time to be able to be 
here.
    I would like to be able to follow up on Mr. Budd's 
questions just a little bit. We seem to have some evidence 
that, in terms of derisking, it has been showing to be able to 
push customers from larger institutions into smaller 
institutions. Obviously, the bigger institutions have the 
financial resources to be able to do the exams, to be able to 
handle and have the backup people that are there.
    And I guess my question to you is a little bit twofold. Do 
you anticipate that the CDD rule and derisking trend is going 
to trickle this down to the smaller institutions to the point 
to where they may stop offering products and services, getting 
people unbanked?
    And then, as a little bit of a follow up to that, I think 
it was a comment in relation to the CDs being individual new 
accounts coming up. You had made the comment that, I think you 
said, ``I think the regulators will take this into account.'' 
So I would like to know if you have had conversations with the 
Federal Reserve, OCC, FDIC, and others issuing guidance in 
terms of how they are interpreting what you are trying to be 
able to develop?
    Mr. Blanco. Let me answer the first one on whether it would 
trickle down. I don't believe that the CDD rule would trickle 
down and have an effect, but it is something that has been 
commented on by more than several people, and it is something 
that we will monitor.
    We want to make sure that we are looking at that very 
carefully. And if bank accounts are being closed or denied, we 
want to make sure that we understand why that is happening. As 
we have done in the last couple of weeks, we are happy to make 
tweaks as we go along in this rule. We are not averse to doing 
that as the rule becomes implemented and as our Federal 
examiners begin doing exams.
    With respect to the CD rollover, we have had conversations 
with our Federal counterpart regulators, and I think we are all 
in agreement that there is going to be this time period where 
we are learning how better to do the exams with respect to the 
CDD, and we are learning also how industry is beginning to 
implement it.
    It is not a gotcha game. I think we all agree to that. We 
have agreed to work with them as they do their exams and learn 
from their exams and maybe participate in some of their exams 
as we move forward. I think it is going to be a collective 
effort. Nobody here is playing the gotcha game.
    What we really want, Congressman, what we really need is 
accurate information. That is what we want. That is what we are 
looking for. We are not looking to punish the financial 
institutions. That is not what we want. There is no value in 
that.
    Mr. Tipton. I would concur. I think we all want to be able 
to achieve the same goal, but just given the industry concerns 
that currently are there, I think that it does beg for some 
real actual clarity in terms of some of the enforcement that is 
going to be going on.
    You have just said that we are going to be--it is a work in 
process. But I think when we are talking to, and I have a 
primary concern for a lot of our smaller financial 
institutions, smaller credit unions as well, in terms of some 
of the compliance costs in that they are going to be associated 
with this. How does that actually play out when they have a 
moving target, while they have some enforcement activities, if 
they are deemed to have been at fault at some level?
    Mr. Blanco. Congressman, I will disagree with you in that 
aspect that it is a moving target.
    The conversations regarding CD really have gone back all 
the way to 2016 when we started talking about these things. And 
then it morphed into conversation with industry. We have had 
several hearings. In 2012, it came up. In 2016, we issued the 
rule. We have had extensive conversations. Congressman, just 
recently, in meetings with industry, they all said--I was 
approached myself and said: Ken, this thing needs to happen. Do 
not delay it anymore. We are ready.
    So I think that--and I am very sympathetic to the community 
banks and the credit unions. I really am, coming from a suburb 
of Miami. I am very sympathetic to it.
    We will be watching it, Congressman. They are ready. And I 
think they are going to do a great job moving forward. We are 
working with our examiners to make sure that they understand 
what we are looking for. We are sympathetic to what they are 
examining for. Soundness and safety and also AFC--AML/CFT.
    It is a work in progress like any new rule or any new 
legislation that is passed. You have to work through the 
difficulties of how you are going to examine and how you are 
going to enforce it. But we are going to be doing it with our 
ultimate goal of making sure that we get the right information, 
not necessarily hammering people.
    But there are going to be some people who frankly, I can 
tell, we are all adults here, who feel like they don't have to 
comply or they have to comply only when we issue a notice of 
exam. That is when, all of a sudden, you see 50, 60 people show 
up because now they have a compliance section.
    That is not compliance. And that is not complying with the 
CDD rule.
    Mr. Tipton. I appreciate the efforts that you are making on 
it. And I think am actually empathetic to the point of making 
sure that we are trying to be able to get it right rather than 
just issuing a hard and fast rule. We like to make sure that I, 
personally at least, encourage you, when we are looking at some 
of the enforcement, we get as much clarity as soon as we 
possibly can and then implement some of that flexibility as we 
are seeing this work through the various institutions of 
different size as well.
    So thank you. I yield back, Mr. Chairman.
    Chairman Pearce. The gentleman's time has expired.
    Mr. Blanco, thank you very much for your testimony. Thank 
you for your service and for being here today.
    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.
    This hearing is adjourned.
    [Whereupon, at 3:45 p.m., the subcommittee was adjourned.]

                            A P P E N D I X



                              May 16, 2018




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