FinCen, 'Panama' and Johnson Verdict Raise the Transparency Bar

FinCen, 'Panama' and Johnson Verdict Raise the Transparency Bar

September 2016


As we approach the midpoint of 2016, two of the most pressing matters in the payments industry have become more acute—the push for greater transparency and accountability in merchant acquiring and processing.

From the Jeremy Johnson verdict to the Panama Papers, and now with the proposed “beneficial ownership” rule, regulators are pressing banks, payment processors, and independent sales organizations (ISOs) to both “know your customer” and take steps to limit the use of legitimate financial services for illicit purposes. Although the furor over Operation Chokepoint may have died down, the underlying concerns remain an important focus of financial regulators.

Whether fair or not, the new reality is one where payments companies are expected to understand their customer’s business and ownership structure, and monitor their customer’s transactions for signs of illegitimate activity. With the beneficial ownership rule scheduled to become effective on July 11, 2016 (with mandatory compliance required by May 11, 2018), payment companies should begin reviewing their policies, procedures, and internal controls now in order to prepare for enhanced expectations of transparency and accountability.

The indictment describes the defendants’ process of “rebranding”—meaning to cause the iWorks products to be sold under new names on websites created for the shell companies—and their use of “dummy” websites and other false information to have their applications approved by banks. As explained in the DOJ’s sentencing memorandum, the defendants submitted merchant processing applications with false and misleading information “with the intention of and for the purpose of concealing from the bank iWorks[’] true ownership and control of the accounts.” Johnson is in jail pending sentencing, when he will face a maximum potential sentence of 240 years in prison. He also faces a separate Federal Trade Commission complaint that has been stayed pending final resolution of the criminal case.

While the use of offshore shell companies is not per se illegal, the release of the Panama Papers has focused media and regulator attention on the broader issues of transparency and accountability in domestic and international financial transactions. As was the case with Jeremy Johnson, the concern is that the use of shell companies may allow beneficial owners to engage in illegal activities without law enforcement being able to detect those activities or identify the individuals responsible for them.

To address this risk, the rule requires that each time a new account is opened for a “legal entity customer”—even for an existing customer—the financial institution must obtain current beneficial owner information, including a certification from the individual authorized by the customer to open the account that the information submitted is accurate to the best of his or her knowledge. FinCEN has emphasized that the beneficial ownership rule is an important part of a financial institution’s customer identification and verification process.

The three developments serve as a warning for every financial institution, payment processor, and ISO to incorporate customer due diligence and monitoring into its compliance policies and procedures.

Although the beneficial ownership rule is technically limited to banks and certain other types of financial institutions, payment processors and ISOs will be responsible for its implementation. Acquiring banks will push beneficial ownership responsibilities down to processors and ISOs as part of the merchant account opening process. Applying appropriate policies and procedures to verify beneficial owners may require processors and ISOs to implement new software and internal controls. Given the time it often takes to bring new technology on line, processors and ISOs should begin taking steps now to prepare for May 2018, when compliance with the beneficial ownership rule is mandated.

Today, federal regulators expect payment processors, ISOs, and others in the payments industry to understand their customer’s business and corporate structure and take steps to limit the use of the payments ecosystem for illicit purposes. The Johnson case, the Panama Papers, and the beneficial ownership rule have accelerated these expectations, placing a greater emphasis on transparency and accountability in the payments industry.

Andrew Bigart is a Counsel in the Washington office of Venable LLP.

This article was written by Andrew Bigart from PaymentsSource and was legally licensed through the NewsCred publisher network.

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