MARCH 22, 2011

http://online.wsj.com/article/SB10001424052748704355304576214852895407540.html?mod=googlenews_wsj

Even as governments freeze assets tied to regimes in Libya, Egypt and Tunisia, U.S. banks are resisting efforts to tighten international rules to prevent the flow of money from corrupt politicians.

The Financial Action Task Force, part of the Organization for Economic Co-operation and Development that sets international standards for money-laundering laws, is conducting a review of its guidelines aimed at closing loopholes.

The review, due to be completed later this year, comes amid criticism of banks for holding billions of dollars in assets allegedly belonging to regimes in Libya, Egypt and Tunisia. Swiss bank regulators are looking into whether a dozen Swiss banks followed antimoney-laundering laws in accepting money from officials in those three countries.

"Banks will have understood that no head of state will have earned these sums of money legitimately," says Mark Pieth, chairman of the OECD's antibribery group. "The very fact that they have found this money begs very serious questions."

But U.S. banks are pushing back against a proposal by the FATF that would require financial institutions to identify the person who ultimately benefits from an account. The proposal would toughen the existing standards, which call on banks to take reasonable measures to identify the beneficial owner of an account.

The strengthened requirements would force banks to "identify and take reasonable measures to verify the identity" of an individual who controls the account. While some countries such as Switzerland, already require that banks know the individual, U.S. banks generally allow accounts to be opened in the name of a trust, without mandated disclosure of the beneficiary.

The International Banking Federation is resisting changes by the FATF. The trade group says toughening customer-disclosure standards wouldn't solve the problem unless governments include the real beneficiary of a trust or a legal entity in their corporate registries.

While the group includes banking-industry associations from around the world, people familiar with the matter said most of the opposition comes from U.S. banks, especially those with large trust operations.

The proposal also has been criticized as too weak and likely to encourage those seeking to cloak their identities to devise even more impenetrable structures.

"That's just an open invitation to criminals to create structures with more layers in different jurisdictions to make it more difficult to figure out who the beneficial owner is," said Heather Lowe, legal counsel at Global Financial Integrity, a research and advocacy group. Instead, she said, banks should be required to consider whether the ownership structure is "reasonable" given the commercial activities of the company or the profile of the account holder.

Such concerns flared about a decade ago, after it became clear that some banks had failed to stop "kleptocrats" such as late Nigerian dictator Gen. Sani Abacha from depositing huge sums. The current unrest has brought new attention to how financial institutions screen politically connected clients, their family members and close associates for potential corruption.

Also being debated is the question of which politically connected individuals should be screened. FATF standards now require financial institutions to treat as high-risk the accounts of so-called politically exposed persons, or PEPs, such as public officials and diplomats, and those close to them.

In an effort to plug gaps, the FATF has proposed that domestic officials be treated as high-risk for the first time. Now, only foreign officials are considered high-risk by the OECD group. The task force also has moved to make the rules more explicit by requiring banks to give the same enhanced due diligence to family members and close associates of PEPs.

But some banks say that some groups of politically connected people, such as domestic politicians, typically are low-risk, adding that the additional requirement would increase the cost of screening, already tens of millions of dollars for a large bank. The banks contend they should have more discretion in deciding whether a client is risky or not.

FATF officials also are discussing whether to require countries to supply to banks lists of senior and middle-level politicians to make it easier for the banks to keep track of those who should be treated as high-risk. Since there now are no official lists of high-risk politically exposed persons, banks typically screen clients against commercial databases, which can be unwieldy and sometimes inaccurate, particularly in developing countries where information is limited.

The U.S. has been under pressure from the international community on the issue of beneficial ownership. A 2006 FATF peer review found the U.S. system lacking, saying "there are no measures in place to ensure that there is adequate, accurate and timely information" on who ultimately owns and controls an account. "This is a vulnerability," the review added.

U.S. regulators say they put great pressure on banks to make sure they obtain account-holder information from potentially risky clients before doing business with them.

Robert Rowe, vice president and senior counsel for regulatory compliance at the American Bankers Association, says banks are mindful of reputational risk and that the current system for determining beneficial owners has "been working well, not perfectly, but no system is perfect."

"It gets to the point where in order to open an account you'd have to hire a private investigator and do a full investigation," he said. "Our position is that that kind of use of resources doesn't make sense."