July 23, 2018

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Anti-money Laundering Regulators Bringing Transparency into Clear Focus

Fueled by the leak of the Panama Papers, the Financial Crimes Enforcement Network (FinCEN) has converted its proposed beneficial ownership regulation into a final regulation that requires financial institutions to identify and verify beneficial owners of their legal entity customers. Heralding the new regulation as a critical step in its effort to prevent criminals from using companies to hide their identity and launder criminal proceeds, the Treasury Department, buttressed by new Justice Department initiatives, is amplifying the momentum building within the anti-money laundering (AML) enforcement community to achieve unprecedented transparency across the corporate spectrum.

In formulating the final regulation, FinCEN has built upon the customer due diligence (CDD) mandated by existing Customer Identification Program (CIP) regulations. Essentially, it adds a provision requiring financial institutions to identify and verify the natural persons who are beneficial owners of their legal entity customers.

FinCEN made several modifications to the proposed regulation. To give adequate time for retooling of compliance programs, the final regulation takes effect May 11, 2018, two years from its publication date. Once in force, it will apply to all new accounts but will only apply to existing accounts when the institution detects information relevant to reevaluating a customer’s risk profile.

Recognizing that coverage of the proposed regulation lacked some precision, FinCEN has refined the definition of “legal entity customer” to mean a corporation, LLC or other entity created by filing a public document with the secretary of state or similar office. Additionally, the term includes a general partnership and any entity formed under the laws of a foreign country. Trusts, other than statutory trusts, are excluded.

While the regulation prescribes an official Certification Form, its use is permitted but not required. Balancing the benefits with the burdens of accountability, FinCEN requires that information be provided to the best of the knowledge of the person opening an account, rather than without qualification, and no notarization or board approval is necessary. Furthermore, a financial institution may rely on the information supplied by its legal entity customer so long as it has no knowledge of facts that would reasonably call its reliability into question.

Beneficial ownership is measured by two “prongs.” The ownership prong requires identification of any individual who owns 25 percent or more of the equity interests in the legal entity customer, while the control prong requires identification of only a single individual having significant management responsibility. In explaining the verification requirement of the final regulation, FinCEN makes clear that only the identity – not the status – of beneficial owners must be verified, and the acceptability of verification documentation is left to the judgment of the institution. Although verification need not follow procedures identical to the institution’s CIP, all CIP elements are expected to be addressed.

FinCEN makes a point of characterizing beneficial ownership identification as a “snapshot” taken at the time of account opening. Consequently, updating of beneficial ownership information would be triggered only if normal monitoring detects heightened risk in the profile or activities of a legal entity customer. 

Treasury also proposes to issue regulations targeting U.S.-based, foreign-owned, single-member limited liability companies, which typically hold offshore assets and bank accounts. The regulations would require these companies to obtain taxpayer identification numbers and would eliminate the exemption currently shielding them from U.S. reporting requirements.

In the legislative realm, Treasury has asked Congress to introduce legislation which would require a company to disclose the names of its owners at the time it is formed. If enacted, the regulation and legislation would work together to capture critical information when a company commences business and when it opens a bank or brokerage account. This would give U.S. enforcement authorities access to a central registry of beneficial ownership data. While such a registry would undoubtedly be helpful to financial institutions needing to verify the identity of beneficial owners of their corporate customers, Treasury officials have not indicated whether, under the suggested legislation, this information would be available to nongovernmental entities. Additionally, Treasury is recommending that the Foreign Account Tax Compliance Act (FATCA) be amended to require U.S. financial institutions to provide foreign jurisdictions with the same information that foreign financial institutions must provide to the IRS.

Taking independent action, but clearly aligning itself with Treasury in both substance and timing, the Justice Department is submitting proposed legislation addressing illegal proceeds of transnational corruption. These initiatives seek to allow prosecutors to pursue cases directly against corrupt foreign regimes, authorize administrative subpoenas, improve access to overseas records, equalize certain procedural standards between criminal and civil cases, and expand substantive corruption offenses.

With two powerful agencies combining their influence to tighten risk-based controls on money laundering and foreign corruption, it is clear that banks will need to devote increased resources to AML compliance. Demonstrating how highly valued the partnership between government and financial institutions has become, FinCEN has just presented its Second Annual Law Enforcement Awards to the IRS, FBI, Customs, Homeland Security and the New York State Police. The awards, in six categories, recognize where effective use has been made of financial institution reporting to obtain a successful prosecution.

Even though mandatory compliance with the beneficial ownership regulation is two years away and any new legislation will need to pass Congressional muster, bank compliance officers should begin the process of amending their CIP to satisfy the requirements of the new regulation, paying particular attention to account opening processes.

With regard to account opening, bank compliance officers should:

  • Determine whether and to what extent the CIP already captures beneficial ownership information.

  • Develop beneficial owner identity verification procedures for legal entity customers that meet the new regulatory definition, and determine whether and to what extent existing CIP verification procedures should be incorporated.

With regard to account maintenance, compliance officers should:

  • Establish criteria and “red flags” that will trigger beneficial ownership reviews and updates of legal entity customers.

  • Identify legal entity customers that meet the new regulatory definition so that the institution will be able to act when triggering events occur.

  • Consider the need, despite no regulatory requirement, for conducting standardized periodic updates of beneficial ownership information.

© 2018 Dinsmore & Shohl LLP. All rights reserved.


About this Author

Frank A Mayer III, Dinsmore, Financial Services Regulation Lawyer, Enforcement Actions Attorney

Frank A. Mayer, III is a partner and Chair of the Financial Services Regulatory & Enforcement Group (FinsReg).

Frank advises and defends regulated business enterprises with a special emphasis on financial service organizations, foreign banking organizations, U.S. insured depository institutions, non bank credit providers and mortgage loan product platforms, payment systems and related participants, directors, special board committees and officers in connection with supervisory and enforcement matters as well as mergers and acquisitions. He...

(215) 309-8850
Richard M. Berman, Dinsmore, Vendor management Lawyer, Cash Management Attorney, Philadelphia, PA

Richard is a Partner in our Corporate Department and a member of the Financial Services, Regulatory and Enforcement Group (FinsReg). In his more than 25 years of practice, he has gained extensive experience providing legal counsel and advice to national, regional and community based financial institutions as both a law firm partner and in-house counsel.

Richard’s multi-faceted legal experience, coupled with a strategic business sense, allows him to help his clients navigate the many complex legal and business issues that challenge their organizations. He routinely counsels financial services clients on a wide array of matters such as regulation, vendor management, operational matters, cash management, loss prevention and security, claims, litigation, lending and asset recovery. With special concentration on the operational side of the institution, he has assisted his clients in responding to a broad spectrum of issues arising on a daily basis, including interbank payments, internal and external fraud, customer claims, customer transactional issues, retail operations issues, bank security concerns, legal process, lending and vendor management matters. Richard also is skilled in advising financial institutions on matters involving the Uniform Commercial Code (UCC), Electronic Funds Transfer Act/Regulation E, National Automated Clearing House Association (NACHA) Rules, and Expedited Funds Availability Act/Regulation CC.

His flexible, integrated approach to addressing complex issues, transactions, claims, litigation and regulatory matters allows him to guide clients through the multi-dimensional impact of decisions including the impact upon various constituencies. Richard’s ability to assess risks from a strategic and practical view as well as his ability to communicate legal terms in a way his clients understand make him a trusted advisor. 

(215) 309-8851
Jonathan L. Levin, Dinsmore, banking issues lawyer, Charter Licensing Matters Attorney
Of Counsel

Jonathan Levin is Partner Of Counsel in our Philadelphia office and a member of the Financial Services Regulatory & Enforcement Group (FinsReg) in the Corporate Department. He focuses his practice on providing regulatory counsel to banks and financial companies.

After 21 years in private practice, he joined Bear Stearns & Co. Inc. in October 2006 as Chief Compliance Officer and Chief Regulatory Counsel of their subsidiary bank. Before joining Dinsmore, he maintained his own financial services law practice for seven years.

(610) 408-6043