FTC Staff Comment on Financial Crimes Enforcement Network’s Proposed Customer Due Diligence Rule for Financial Institutions

UNITEDSTATESOFAMEIDCA
FEDERAL TRADE COMMISSION
Bureau of Consmner Protection
Burea\1 of Economics
October 3, 2014
Ms. Jennifer Shasky Calvery
Director
WASHINGTON, D.C. 20580
FinancjaJ C1imes Enforcement Network
Department of the Treasury
P.O. Box 39
Vie1ma, VA 22183
Re: 	Docket Number FINCEN-2014-0001; RIN 1506-AB25:
Customer Due Diligence Requirements for Fl:nancial Institutions
Dear Director Shasky Calvery:
The staffs oftbe Federal Trade Commission's BurealU of Consumer Protection
and Bureau of Economics (collectively, ''FTC staff"i appreciate the opportunity to
comment on the Financial Crimes Enforcement Netwotk's C·'FinCEN") proposed
Customer Due Diligence Rule ("CDD Rule" or "Rule''). 2 FTC staff offers the following
comments on the potential impact of the proposed changes to improve the Commission 's
ability to gather financial intelligence to track down the perpetrators offraud. 3
1 These comments represent the views of the staff of the Federal Trade Commission's Bureau of
Ec.onomics and Bureau of Consumer Protection. The letter does no~ necessarily represent the views of the
Fe deral Trade Commission or of any individual Commissioner. The Co;mmission has, however, voted to
authorize us to submit these comments.
2 Notice of Proposed Rulemaking Customer Due Diligence Requirements for Financial Instimtions
("NPRM''), 79 Fed. Reg, 45151 (Aug. 4, 2014). In 20 12 , FinCEN published an Advanced Notice of
Proposed Rulemaking ("ANPRM") requesting public comment on wheth er it should implement a rule to
codify and strengthen CDD requirements for financial institutions. 77 Fed. Reg. 13046 (Mar. 5, 2012).
1 This comn1eut serves to explain how the proposed Rule wou ld assist the FT C's law enfoi'cement efforts
aimed at fighting fraud in the marketplace. As discussed below, theFT( : lacks jurisdiction over banks and
does not have access to information about the full impact of the proposed Rule on consumers.

I. 	Introduction
On August 4, 2014, FinCEN published a Notice ofProposed Rulemaking
("NPRM") requesting public conunent on the proposed CDD Rule pursuant to its
authority to implement, administer, and enforce compliance with the Bank Secrecy Act
("BSA") and associated laws and regulations. 4 The proposed Rule is aimed at clarifying
and strengthening the customer due diligence requirements for U.S. financial institutions.
As the NPRM describes, the proposed CDD Rule would make explicit certain existing
customer due diligence requirements for covered financial institutions: identifying and
verifying the identity of customers; understanding the nature and purpose of customer
relationships; and performing ongoing monitoring to maintain and update customer
information. 5 The Rule also proposes additional CDD requirements with respect to the
collection of beneficial ownership information on the natural persons behind certain
defined legal entity customers. 6
II. 	FTC's Law Enforcement Experience
The Federal Trade Comnnssion ("FTC" or "Commission") is an independent
agency responsible for safeguarding consumers throughout nearly all segments of the
economy. 7 To fulfill its consumer protection mandate, the Commission enforces the
Federal Trade Commission Act, 15 U.S.C. §§ 41-58, and other laws that prohibit
businesses from engaging in practices that are deceptive or unfair to consumers. In
addition, the Commission engages in policy research and advocacy, public education
outreach, and rulemaking.
Promoting consistent standards and practices for robust CDD is critical to
detecting money laundering in the U. S. financial system. By establishing consistent
minimum CDD standards, the proposed Rule will likely reduce the ability of perpetrators
of fraud from exploiting financial institutions to conduct illicit financial activity.
The proposed Rule would include a new requirement to collect beneficial
ownership information for legal entity customers. The NPRM notes that the beneficial
ownership information requirement does not represent a significant departure from
4 The BSA is codified at 12 U.S.C. § 1892b, 12 U.S.C. §§ 1951-1959, 18 U.S.C. §§ 1956-1957 & 1960,3 1
U.S.C. §§ 5311-5314 and 5316-5332, with implementing regulations at 31 C.F.R. Ch. X. See31 C.F. R. 9
1010.1OO(e).
5 The proposed rule would apply to banks, brokers or dealers in securities, mutual funds, and futures
commission merchants and introducing brokers in commodities. NPRM, 77 Fed. Reg. 45152.
6 Jd. at 45 I 56. The proposed rule defines a "legal entity customer'' to mean a corporation, limited liability
company, partnership or other similar business entity that opens a new account. Jd. at 45170.
7 The Commission has authority over most nonbank entities. See 15 U.S.C. 44, 45(a)(2) (excluding from
the Commission's jurisdiction several types of banking entities, including, banks, thrifts, and federally
chartered credit unions).
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existing guidance for fmancial institutions. This existing guidance, issued jointly by
FinCEN and other bank regulators in 2010, suggested a risk-based approach for
identifying and verifying beneficial owners of all customers, not just legal entities, and
recognized the heightened risks that may be associated with the use oflegal entities. 8
Moreover, in response to comments by financial institutions, FinCEN bas significantly
nan·owed the scope of the proposed Rule. The Rule would no longer require a financial
institution to verify that the natural persons identified as the beneficial owners are, in fact,
the beneficial owners, as the ANPRM suggested in one proposed approach to verifying
beneficial ownership information.9 Instead, a financial institution would need to obtain a
completed Certification of Beneficial Owner(s) form , a standardized di sclosure document
specified in the Rule, in the course of perfonning existing routine customer identification
procedures. 10
The availability of information on beneficial ownership and control oflegal entity
customers would significantly enhance law enforcement's ability to track down
individuals behind shell corporations used for illicit financial transactions. As a
consequence, the FTC could shut down fraudulent operations more quickly, which would
mean that fewer consumers would be victims.
The Commission's Jaw enforcement experience amply demonstrates the abuse of
legal entities to launder the proceeds of fraud and conceal the identities ofthe individuals
behind fraudulent operations. Recent cases brought by the Commission have included
the followi ng allegations and relevant facts:
• 	Individual defendants utilized a foreign company to cloak their personal
involvement in a telemarketing scheme that used deceptive prerecorded messages
on behalf of clients selling a variety of dubious products, including extended auto
warranties and credit card interest rate reduction programs. 11
8 Fin. Crimes Enforcement Network et al., Guidance on Obtaining and Retaining Beneficial Ownership
Jnfonnation, FIN-2010-GOOJ (Mar. 5, 2010) (Joint Release) (noting legal entities can be used "to conceal
the identity of the true owner of assets or property derived from or associated with criminal activity ....
[or] the nature and purpose of illicit transactions and the identities ofthe persons associated with them").
9 See ANPRM , 77 Fed. Reg. 13053.
10 NPRM , 77 Fed. Reg. 45170-72. The standardized disclosure form would require that the person opening
a new account on behalf of a legal entity provide the name, address, date of birth and social security
number (or passport number or similar information, in the case of foreign persons) fo r the following
individuals (i.e., the beneficial owners): each individual, if any, who owns, directly or indirectly, 25 percent
or more of the equity interests of the legal entity customer, and one individual with significant
responsibility for managing the legal entity customer. !d.
11 Pl.'s Mem. in Supp. of Its Ex Parte Mot. for a TRO at 2, FTC v. Asia Pacific Telecom, Inc., Civ. No. I 0-
3168 (N.D. Ill. May 24, 20 I 0).
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• 	Individual defendant enlisted nominees to create dozens oflegal entities used to
hold and conceal from authorities millions of dollars in assets, including assets
connected to illegal online poker payment processing. 12
• 	Fourteen individuals, acting as "money mules," set up sixteen corporate entities
that they used to open bank accounts and funnel the proceeds of a massive
unauthorized charging scheme to the masterminds of the scheme- John Doe
defendants located abroad. 13
• 	Individual defendant subject to $4.43 million FTC judgment used a shell
corporation and nominal officer to conceal his beneficial ownership of $4 million
in the corporation's bank account. Among other evidence, the Commission used
photographs of the individual defendant accessing the bank account in support of
garnishment of the account. 14
• 	Individual defendants enlisted friends and relatives to form and organize more
than 240 shell companies created to open approximately 400 bank accounts into
which the proceeds of the defendants' deceptive coaching scheme were
transferred. 15
The collection of beneficial ownership infonnation is merely one element of a
financial institution's risk assessment of legal entity customers. As these cases illustrate,
however, the addition of such information can be critical in identifying and thwarting the
use of nominal officers and shell corporations to impede law enforcement and commit
financial fraud. Some perpetrators of fraud and illicit financial transactions seeking
anonymity could be deterred by the disclosure of identifying information, including the
name, date ofbirth, and social security number of a natural person. Even false
inf01mation provided to financial institutions can be useful to prove an individual's
knowledge of unlawful activity or intention to conceal assets.
In addition, the collection of beneficial ownership information by U.S. financial
institutions will bring the U.S. in line with the requirements adopted by many participants
12 Order Granting Mot. for Clarifying Prelim. lnj. and for Fwther Instructions Regarding Scope of
Receivership Defendants Under Prelim. Inj. ~ 3, FTC v. Jeremy Johnson, Ci v. No. 10-2203-MMD-GWF
(D. Nev. Mar. 25, 2013). 	.
13 Pl.'s Mem. in Supp. of Its Ex Parte Mot. for a TRO at 4, FTC v. API Trad e, LLC, Civ. No. 10-1543 (N.D.
lll. Mar. 9, 2010).
14 Pl. ' s Mem. in Opp. To Mot. to Quash Writ of Continuing Gamishment at I and 7, FTC v. Khali!ian, ec
a/., Civ. No. 10-21788-COOKE/TURNOFF (M.D. Fla. Jan. 17 , 2013). The court found the FTC
established a prima faci e case supporting continued garnisl:unent of the account. Omnibus Order at 2
(dated Jan. 28, 2013).
15 Report of Temporary Receiver of Apply Knowledge LLC at 7, FTC v. Apply Knowledge LLC, Civ. No.
0088-DB (D. Utah Mar. 7, 2014).
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1n the global financial system. As the Department of .Justice comment noted in response
to the ANPRM, many countries already requiTe beneficial ownership information at the
time of account opening. 16
Ill. 	Conclusion
FTC staff appreciates the opportunity to provide examples of its encounters with
the use of shell corporations and nominal owners. We hope these comments will assist
FjnCEN in evaluating wbed1er the proposed CDD Rule will improve law enforcement's
ability to investigate an d uncover financial transactions in which perpetrators fun11eJ the
proceeds of fraud through the U.S. financial system.
Respectfully submitted,
Michael G. Vita, Acting Director
Bureau of Economics
16 U.S. Dep't of J ustice, Asset ForfcitUJ'e and Money Laundering Section Comment 2 (June ll , 20 12) .
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