Earlier this year, the Financial Crimes Enforcement Network (FinCEN) published new rules that strengthen customer due diligence (CDD) requirements for banks, brokers or dealers in securities, mutual funds, and futures commission merchants and introducing brokers in commodities (collectively, so-called, Covered Financial Institutions). The new rules, which go into effect May 11, 2018, place new due diligence obligations on covered financial institutions to identify and verify the identity of beneficial owners of legal entity customers. The expanded CDD obligations create a fifth pillar for Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) program compliance.
Under pre-existing law, covered financial institutions were not required to know the identity of the individuals who own or control their legal entity customers (that is, the beneficial owners of those legal entities). Now, in order to comply with the new regulations, they will be required to identify and verify the identity of certain beneficial owners at the time a new account is opened. The identification and verification procedures used to do so will be very similar to those used for individual customers under existing customer identification programs (CIPs).
Under the rule, there are now four core elements of CDD that should be explicit requirements in the anti-money laundering programs of all covered financial institutions:
- Customer identification and verification;
- Beneficial ownership identification and verification;
- Understanding the nature and purpose of customer relationships to develop a customer risk profile; and
- Ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information.
There are a number of motivations for the rule changes, but certainly high among them—and a driving motivation that may not be readily apparent to many—is the government’s desire to facilitate tax compliance and advance commitments made to foreign governments in connection with the Intergovernmental Agreements (IGAs) that the United States has entered into with other countries as part of the Foreign Account Tax Compliance Act (FATCA). Those agreements require foreign counterparts to provide information to our government about whether certain legal entities are controlled by U.S. persons (i.e., to identify U.S. beneficial owners). Under our law as it has existed, the United States does not reciprocate such information about foreign beneficial owners of legal entities. (See my prior post on the Panama Papers for a discussion about this.) As part of those IGAs the U.S. committed to pursue equivalent levels of reciprocal automatic exchange. Requiring covered financial institutions to obtain beneficial owner information for BSA/AML purposes advances this purpose, putting the U.S. in a better position to combat offshore tax evasion and other financial crimes.