In contrast, we expect financial criminals to incur much higher costs for disclosing previously private beneficial ownership information, as the consequences of disclosure could include denial of services by financial institutions, asset forfeiture or prosecution and imprisonment. Given that the express intent of the final provision is to increase the cost of criminal activity, this variation in the cost of the invasion of privacy is consistent with the intended effect of the final regulations. We do not attempt to estimate the value of loss of privacy. In summary, the rule would oblige the financial institutions concerned [185] to collect and keep records of the information used to identify and verify the identity of the names of the beneficial owners [186] of their customers from legal persons (other than those excluded from the definition). [187] 47.  Under the CIP rules, a financial institution`s CIP must include procedures to address circumstances where the financial institution cannot reasonably assume that it knows the true identity of a customer. These procedures should describe: (A) the circumstances in which the institution should not open an account; (B) the conditions under which a Client may use an Account while the Institute attempts to verify the Client`s identity; (C) If it closes an account after attempts to verify a customer`s identity have failed; and (D) whether it is required to file a suspicious activity report in accordance with applicable laws and regulations. See, for example, 31 CFR 1020.220(a)(2)(iii). Some commentators have criticized the general approach of the regulatory system, according to which the costs would accrue almost exclusively to financial institutions, while the benefits would accrue to society at large and not to financial institutions and their customers. This makes the customer due diligence system an illegal tax imposed on financial institutions. But this rule is not a tax. Further, we do not agree with the classification of this regulatory regime as inappropriate or unusual. There are many federal regulatory systems that have similar assumptions, structures, and effects – for example, the cost of some environmental regulations falls primarily (if not almost exclusively) on emission producers (power plants, automakers, etc.), while members of society as a whole benefit.

Like environmental regulations, the customer due diligence rule aims to correct positive contagion, which in this case leads to a less effective level of investment in AML/CFT safety measures. In particular, reducing illegal activities through the collection of beneficial ownership information will benefit all members of society, but financial institutions will rationally consider only their own benefits when making their investment decisions. By requiring financial institutions to retrieve beneficial ownership information, the customer due diligence rule aims to increase investments in AML/CFT measures to a level that leads to higher overall welfare (even when the costs to financial institutions are offset). Recognizing the cost of implementing the customer due diligence rule, we have made numerous changes to the rule itself, as described in the preamble above, to minimize the impact of compliance on the financial institutions involved while furthering the objectives of the rule. As described above in the sections on banks and broker-dealers, we believe that this amendment to the continuous monitoring provision is more consistent with current practice and, therefore, with the nature of the obligation, i.e.: when, in the course of their normal monitoring, investment funds discover information relevant to the risk assessment of a client relationship. They are then expected to update customer information. Under the new requirement to collect beneficial ownership information under these regulations, this customer information would include beneficial ownership information and would apply to both new and existing information at the time of applicability. To calculate the crime reduction benefits of the customer due diligence rule, we would need to know both the causal negative impact of the customer due diligence rule on the extent of the illegal activity (see above) and the costs to society of the illegal activity, which would not happen without the rule. Enumerating these costs is not as straightforward as it seems, so we follow the literature on the cost of crime when distinguishing between the “social costs” and “external costs” of crime to take a closer look at the potential benefits of the final rule.

[141] External costs are those unintentionally imposed on one person (the victim) by another person (the perpetrator). In the case of a car theft, external costs could include, for example, the resale value of the vehicle, the value of the items in the vehicle at the time of the theft, the value of the time spent by the victim dealing with the consequences of the offence, and any psychological pain and suffering of the victim. However, regardless of whether the abuser keeps or sells the vehicle and the items in it, they are always available to someone in society and can be considered person-to-person transfers. Therefore, it could be argued that, unlike the pain, suffering, and lost time of the victim – losses that are not offset by gains for someone else – the value of stolen property (or money) is not a social cost. [142] This view is consistent with the integration of the authors` well-being into overall social welfare, for example when evaluating crime reduction policies. However, according to a recent survey, “in practice, researchers have generally taken the view that an offender`s performance should not be considered part of society`s welfare function.” [143] We also take this approach in the IRS and use external costs as a concept relevant to the cost of crime, which means that any reduction in funds involuntarily transferred from victim to offender would be an advantage of the client due diligence rule. 127. The rule is Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. It required Member States to comply by 15 December 2007. All substantive comments received on the NPRM, FinCEN`s response, and resulting changes to the final rule will be discussed in detail in the following section-by-section analysis.

But first we will make some general observations. One commentator questioned the need to include nature and purpose in the rules of the anti-money laundering broker-dealer program if it is an integral part of suspicious activity reporting.