FinCEN Deletes Ownership Data but Banks Keep the Risk

The federal government spent years building toward a centralized answer to one of banking’s oldest compliance questions: Who actually owns the company moving the money? Now, much of that answer is disappearing.

The U.S. Treasury Department announced on Tuesday (Aug. 11) that its Financial Crimes Enforcement Network (FinCEN) is permanently removing U.S. companies and U.S. persons from beneficial ownership reporting under the Corporate Transparency Act and will delete previously reported information. Foreign reporting companies remain subject to narrower requirements involving foreign beneficial owners.

Treasury Secretary Scott Bessent characterized the move as eliminating a burden on millions of legitimate business owners without compromising national security.

But eliminating a government reporting requirement does not eliminate the financial system’s need to understand corporate ownership. Banks, broker-dealers and other covered financial institutions remain subject to customer due diligence obligations designed precisely to prevent criminals from hiding behind legal entities. They must identify and verify beneficial owners in specified circumstances, understand customer relationships, build risk profiles and monitor for suspicious activity.

The compliance burden for financial institutions still expected to detect shell companies, money laundering and hidden counterparties, in other words, may not disappear with the database. It may become more distributed.

See also: Innovation Keeps Expanding Compliance for Mid-Market Firms

The Beneficial Ownership Database Was Meant to Solve an Information Problem

The Corporate Transparency Act was built around a straightforward premise. Corporate formation in the United States is fragmented across states, while the entities created through that system can transact globally. That makes legal incorporation easy to observe but ultimate ownership considerably harder to establish.

The beneficial ownership information regime was intended to narrow that gap by requiring covered companies to tell FinCEN which natural persons ultimately owned or controlled them. Under the framework, beneficial ownership generally captured people owning at least 25% of an entity or exercising substantial control.

As of the Treasury Department’s Tuesday announcement, domestic companies will no longer have to populate the system. That creates a consequential asymmetry: Washington is reducing the amount of ownership information companies must provide to the government while financial institutions continue to operate inside an anti-money laundering (AML) framework that depends on knowing who is behind their customers.

PYMNTS covered at the end of last month (July 23) how ID verification firm Trulioo has debuted an artificial intelligence (AI) agent designed to resolve beneficial ownership questions. The company’s UBO Discovery Agent is part of Trulioo’s larger UBO Discovery capability, which is itself housed with its business risk and know your business (KYB) verification workflow.

According to PYMNTS Intelligence’s “State of Fraud and Financial Crime in the United States,” 46% of financial institutions report increasing sophistication in fraud schemes. Nearly half of the executives surveyed by PYMNTS Intelligence and Block cite regulatory pressures as a big challenge.

See more: Why CFOs Are Getting Smart on B2B Card’s Identity Benefits

Corporate Identity Becomes a Data Infrastructure Business

A bank deciding whether a customer’s risk profile has changed needs to know whether its understanding of the customer remains accurate. A transaction monitoring system looking for unusual flows across related businesses becomes more useful when those businesses can be connected to common owners. Sanctions, fraud and AML investigations similarly become harder when investigators can see the corporate entities moving money but not easily resolve the humans behind them.

This is where the regulatory change becomes a technology story. Beneficial ownership compliance can become less of a document-collection exercise and more of an entity-resolution problem: determining whether two businesses share an owner, whether a director appears across multiple seemingly unrelated companies, whether an address links an apparently legitimate customer to a suspicious network, or whether changes in control alter the risk associated with existing transactions.

The PYMNTS Intelligence report “When ‘Good Enough’ Isn’t Enough: Digital Identity Verification in the Age of Bots and Agents,” a collaboration with Trulioo, found that the share of financial services firms that said identity processes prevent them from expanding customers, markets or geographies is 76.1%, while KYC/KYB failures produced revenue losses equal to 3% of revenue, or nearly $34 billion across the industry.

For a small business, eliminating a federal filing is straightforward regulatory relief. For a financial institution managing millions of customer and counterparty relationships, however, the underlying ownership question remains embedded throughout onboarding, AML investigations, transaction monitoring and customer risk management.

For all PYMNTS B2B coverage, subscribe to the daily B2B Newsletter.