Earlier in February (2012), FATF published revised recommendations, whose impact is summarized by the current director of FINCEN, James H. Freis.
For financials institutions that are impacted by FINCEN rulemaking the key areas of impact include:
- Expanded definition of PEPs (Politically Exposed Persons) to apply to domestic entities. Prior it was defined to foreign entities. Expect financial institutions to revamp their policies and procedures to identify domestic PEPs and apply a risk based approach to perform Enhanced Due Diligence (EDD) and if justified, continued surveillance.
- Addition of tax crimes as predicate offenses; This is a substantial change to status quo though not surprising given the focus by most governments to minimize revenue leakage through tax evasion (e.g., FATCA). There are challenges in identifying tax evasion, as most financial institutions are not privy to the details of filed tax returns to corroborate customer activity. Though blatant evasion (e.g., large cash transactions) may be readily identified, most cases of tax evasion prosecuted by IRS are sophisticated usage of havens, trusts and legal entities which to casual observers are difficult to differentiate from tax avoidance strategies.
It will be interesting how these will pan out in terms of expectations defined by the relevant regulators in the specific industries and the impact of compliance operations within the financial institutions.