Brookings nominates portable digital ID in response to FinCEN RFI on AML rule change

The Financial Crimes Enforcement Network’s (FinCEN) says the rules for financial institutions onboarding U.S. customers to open accounts need to be improved to strengthen anti-money-laundering (AML) and countering the financing of terrorism (CFT) regulation. The Brookings Institution says FinCEN should shift its focus away from prescriptive advice about how to collect AML and CFT information, and towards the adoption of digital identity.

A request for information and comment on the proposed “Customer Identification Program Rule Taxpayer Identification Number Collection Requirement” was published by FinCEN at the end of March. FinCEN focusses on how Americans are identified through their Taxpayer Identification numbers (TINs), which usually takes the form of a Social Security Number (SSN). The agency wants to know what risks and benefits can be gained from collecting partial SSN information and then getting the rest through trusted third parties, and what safeguards should be put in place to protect such a Customer Identification Program (CIP) system.

Rich people gaming the system

People with a lot of money (“high-net-worth individuals” in Brookings’ parlance) can game the AML and CFT systems in a couple of ways that would be difficult to prevent without major investments in more accurate identity verification, the comment argues. Two examples are provided.

The alleged easy impersonation of international baseball superstar Shohei Ohtani by his interpreter, Ippei Mizuhara, to embezzle $15 million to fund a gambling habit demonstrates a fatal flaw in current AML approaches. A letter from seven U.S. Senators to FinCEN points out a second gap, in which investment advisors and private funds provide cover for money laundering and the evasion of sanctions.

But Brookings also notes that the cost of each measure of increased accuracy is higher than the last.

“Economic logic also suggests there is a point at which the marginal costs of enhanced accuracy exceed the marginal benefits,” the statement says. “These costs may or may not be completely borne by the financial institutions charged with identity verification. Consumers bear costs both from the process of proving their identities and from the consequences of being unable to provide required documentation. For some, those costs mean being ineligible for the services they seek, thus being financially excluded.”

FDIC stats show that 4.5 percent of American households are unbanked, and surveys show that identity documentation that meets employment needs is often insufficient to open a bank account.

“The costs of complying with Know Your Customer (KYC) rules as part of AML/CFT efforts drive up the cost for banks to offer basic bank accounts as business try to pass along costs to customers,” Brookings warns.

In other words, current measures are keeping honest people out, while failing to prevent money laundering and sanctions evasion.

A golden opportunity

Given that FATF (the Financial Action Task Force) recommends a risk-based approach, with lower customer due diligence (CDD) thresholds for lower-risk customers, and the use of digital identities, FinCEN sees an opportunity.

“Digital identities involve collecting customer data once and then giving control of how the data collected is used to the customer,” Brooking says. “This contrasts with the current system, where each service provider must separately collect identity details. The current system is repetitive, expensive, and increases opportunities for fraud. Reducing the number of digits of SSN collection is a small step in the right direction, incorporating digital identity creates opportunities for improvement on which FinCEN should capitalize.”

Digital IDs like mobile driver’s licenses (mDLs) are being issued in more states, and FinCEN and U.S. regulators should take advantage of the moment to allow banks to accept them. Faster cross-border payments, reduced fraud and improved compliance, and interoperable payments systems at lower costs could result. Barriers to market entry would be lowered, transparency improved and individual control over identities increased through portable digital identity.

The potential gains to banks, the unbanked, and the global fight against money laundering and terrorism seem like a compelling case.

Article Topics

AML  |  banking  |  biometrics  |  digital identity  |  FinCEN  |  KYC  |  onboarding  |  portable digital identity  |  U.S.A