By Andrew A. Turner, J.D.
The Treasury Department has issued customer due diligence requirements and proposed beneficial ownership legislation to Congress to counter money laundering threats. Final rules under the Bank Secrecy Act for banks, brokers or dealers in securities, mutual funds, and futures commission merchants, and introducing brokers in commodities contain explicit customer due diligence requirements and include a new requirement to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.
The rules issued by Treasury’s Financial Crimes Enforcement Network take effect on July 11, 2016. The compliance deadline is two years from date or issuance, May 11, 2018, to accommodate changes to systems and processes required for implementation.
Customer due diligence requirements. Covered financial institutions must identify and verify the identity of the beneficial owners of all legal entity customers at the time a new account is opened. The financial institution may comply either by obtaining the required information on a standard certification form or by any other means that comply with the substantive requirements of this obligation. Financial institutions are then required to maintain records of the beneficial ownership information they obtain, and may rely on another financial institution for the performance of these requirements, in each case to the same extent as under their customer identification program rule.
The AML program requirement for each category of covered financial institutions is being amended to explicitly include risk-based procedures for conducting ongoing customer due diligence.
In addition, customer due diligence also includes conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. When a financial institution detects information (including a change in beneficial ownership information) about the customer in the course of its normal monitoring that is relevant to assessing or reevaluating the risk posed by the customer, it must update the customer information, including beneficial ownership information. Such information could include a significant and unexplained change in the customer’s activity, such as executing cross-border wire transfers for no apparent reason, or a significant change in the volume of activity without explanation. It could also include information indicating a possible change in the customer’s beneficial ownership, because such information could also be relevant to assessing the risk posed by the customer.
Legislative proposal. Companies formed within the United States would be required to file beneficial ownership information with the Treasury Department, and face penalties for failure to comply, under proposed legislation sent to Congress. Passage of the bill is needed to remedy a weakness in anti-money laundering laws that enable companies to hide beneficial ownership, according to Treasury. In a letter to Congress, Treasury Secretary Jacob J. Lew, said that “existing authorities do not provide all the tools” needed by Treasury in the fight against financial crime.
Lew argued that requiring companies to disclose “the real person behind a company at the time of its creation” is needed to prevent the misuse of companies. Lew also urged the Senate to approve pending tax treaties. In addition, he also asked Congress to provide Foreign Account Tax Compliance Act reciprocity that would require U.S. financial institutions to provide other jurisdictions with the same information that foreign financial institutions must provide to the IRS. Additional statutory authority is necessary “combat bad actors who seek to hide their financial dealings,” he said.
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