The Problem with BSA’s 5th Pillar

One of the many hot topics I have been asked to speak on recently is BSA’s “5th Pillar.”

When asked my opinion on the topic (as with most topics) I have a long answer and a short answer. The short answer is: the 5th Pillar is the FinCEN’s attempt to crack down a little further on illicit money laundering and black market activity. It is trying to deepen the reach of the banking industry into their clients to understand who they are working with further.

The long answer?

While I think the intentions of the 5th Pillar are fantastic, I really think it has missed the mark and is not going to accomplish its goal. You see, the requirements are intended to prevent bad guys from hiding behind the scenes, from maybe owning the company but not necessarily being the front man.

FinCEN says if you own the business, we will know everything about you and the front man. And if you are only managing or in the background? We are not really going to learn anything new. As a result, FinCEN will be collecting more on (and inconveniencing) honest people, including those “influential” who don’t try and hide their role in the company.

The 5th Pillar won’t do anything to get the real crooks, because they may not be owners at all or get payments directly. The new requirements are going to miss a big portion of the bad guys and only the law-abiding citizens will get caught up in this – kind of a pointless pursuit. Most small business owners are doing things legitimately and paying their taxes, while the crooks hide in the shadows.

So, what should you do?

Go beyond the documentation.

If you really want to catch the true bad guys, you need a little more intelligent investigation. Which vendors of your customers are receiving the majority of payments? Which are getting 1099s? As an example, if someone is not an owner or employee and he or she is receiving significant payments, they could be pulling the strings behind the scenes.

Get clear on the WHY.

The other issue is the law only requires we make the effort – not that we actually get the information. Many business owners will be grumpy about being asked to comply with these extra hoops and will not want to provide information. Putting myself in their shoes: if I am a partner who is not actively involved, there is no motivation to get off the golf course, compile a bunch of information and send it off. Being asked (especially if given a line like, “it’s not us, it’s the law”) will make me pretty irritated with my financial institution. It might be enough to drive me to look for a new financial institution (and encourage my business partners to do the same). Yes, this is irrational, but emotions will do this to people. As a financial institution, you need some really clear language on why they are being asked for this and to properly address the emotions of those people before they feel inclined to leave.

Keep an eye out for these other red flags.

If someone is an actual underground operator (who 5th Pillar is intended to catch) they will change up their tactics to avoid detection. If you really want to catch them – and I hope you do! – there are some other red flags to watch out for. Look at the family relationships in the business. Who is being paid in a contractor status? Get the corporate formation documents. Does anything stand out? If there are ever any changes in ownership (or sales of the business), investigate.

Yes, my recommendations are encouraging you to look beyond the words of the law and do a little extra work to accomplish what is in the spirit of the law. Its goal is something we all want, but it will take more than the bare minimum to accomplish it. The requirements themselves are easy to comply with. You can do them no problem. However, if you are like me and really want to catch the bad guys? Well, that will take a little more thoughtful inquiry.

I think it is worth the effort. What do you think?