In an apparent effort to create the impression of strong U.S. policy response in the wake of the Panama Papers, the U.S. Department of the Treasury (Treasury) announced three initiatives to promote greater transparency and reduce the use of shell companies to conduct illegal financial transactions. The first was the release of the Financial Crimes Enforcement Network's (FinCEN) final beneficial ownership rules. Simultaneously, Treasury submitted to the United States Congress a new legislative proposal to require corporations to provide certain information on beneficial ownership at the time of corporate formations. Treasury also proposed a new regulation to require certain foreign-owned single-member limited liability companies to obtain tax identification numbers. Other than the new beneficial ownership rule, the prospects for other legal changes in the near term are questionable. The proposed legislation is not dissimilar to other proposals previously submitted to Congress to create greater transparency in corporation formations, and they have historically been controversial. The proposed Treasury regulation is only the first step of the rulemaking and may not become final for months or years, if at all.
What happened
The FinCEN announcement of its final beneficial ownership rule, coming on the eve of the departure of FinCEN Director Jennifer Shasky-Calvery, caps a more than four-year effort to impose regulations requiring banks and other financial institutions to conduct certain customer due diligence (CDD) on beneficial owners of legal entities. Intended to clarify and strengthen existing CDD requirements, the final rule applies to banks, brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities. These covered entities must now collect certain identifying information on the "beneficial owner" of accounts—the natural person who owns and controls the legal entity—and verify such information.
"The CDD Final Rule advances the BSA by making available to law enforcement valuable information needed to disrupt illicit finance networks," Treasury said in a statement about the final rule. "This will in turn increase financial transparency and augment the ability of financial institutions and law enforcement to identify the assets and accounts of criminals and national security threats. This will also facilitate compliance with sanctions programs and other measures that cut off financial flows to these actors."
The FinCEN rule is deceptively simple. It defines "legal entity customers" to include corporations, limited liability companies (LLCs), general partnerships, and other entities that are created by filing a public document or formed under the laws of a foreign jurisdiction. Excluded from the definition are a number of different types of financial institutions, as well as investment advisers, certain entities registered with the Securities and Exchange Commission, insurance companies, and foreign governmental entities that are engaged only in noncommercial, governmental activities.
Treasury set forth three "core elements" of CDD: identifying and verifying the identity of the beneficial owners of companies opening accounts; understanding the nature and purpose of customer relationships to develop customer risk profiles; and conducting ongoing monitoring to identify and report suspicious transactions, and, on a risk basis, to maintain and update customer information. Every financial institution should include explicit requirements for these elements in its Bank Secrecy Act and anti-money laundering (BSA/AML) program, Treasury said, which will enable clarity and consistency across sectors.
In a new requirement, the final rule requires that covered entities must identify and verify the identity of the beneficial owners of all legal entity customers at the time a new account is opened (even where an existing customer opens a new account).
The financial institution should identify each person or individual who owns 25 percent or more of the equity interests in the legal entity customer and at least one individual who exercises "significant managerial control" over the customer. The two-part process may identify the same individual, and if no individual owns 25 percent or more of the equity interests, then a beneficial owner may be identified solely under the control prong. Financial institutions have a choice about how to comply with the identification rule by using a standard certification form provided by Treasury or "by any other means that satisfy" the substantive requirements of the obligation. The final rule published in the Federal Register includes the certification form.
Like the Customer Identification Program recordkeeping requirement, covered financial institutions must maintain records of the beneficial ownership information collected for five years after the end of the customer relationship and records of steps taken to verify the information for five years after verification. Regulatory expectations that the institution will conduct ongoing monitoring to identify and report suspicious transactions and—on a risk basis—maintain and update customer information are unchanged.
The new Treasury proposal focuses on the beneficial owners of foreign-owned single-member LLCs. These entities would be subject to additional reporting and recordkeeping requirements under the proposal, with the LLCs required to obtain entity identification numbers from the Internal Revenue Service (IRS) (which in turn mandates the identification of a natural person as a responsible party), file an information tax return form each year with the IRS to identify "reportable transactions," and maintain records and books in support.
In addition, Treasury sent beneficial ownership legislation to Congress for consideration. "The Administration is committed to working with Congress to pass meaningful legislation that would require companies to know and report adequate and accurate beneficial ownership information at the time of a company's creation, so that the information can be made available to law enforcement," the agency explained. "The misuse of companies to hide beneficial ownership is a significant weakness in the U.S. anti-money laundering/counter financing of terrorism regime that can only be resolved by Congressional action."
The Treasury proposal would require companies formed in the United States to file beneficial ownership information with Treasury at the time of creation or ownership transfer, with civil money penalties for the failure to comply. Technical amendments to the Geographic Targeting Order (GTO) authority would also clarify FinCEN's power to collect information under GTOs, such as those issued earlier this year addressing "all cash" real estate purchases made in Miami and New York City.
To read the final CDD rule, click here.
To read the NPRM, click here.
To read the proposed legislation, click here.
Why it matters
Furthering Treasury's goal of cracking down on money laundering, the final rule strengthens CDD requirements for financial institutions. While the rule goes into effect in July, covered entities have until May 11, 2018, to achieve compliance. The extension for implementation was one of several changes FinCEN made from the August 2014 proposed rule, including expanding the list of exemptions and making use of the standardized beneficial ownership form optional. Treasury "has long focused on countering money laundering and corruption, cracking down on tax evasion, and hindering those looking to circumvent our sanctions," Treasury Secretary Jacob J. Lew said in a statement about the final rule, NPRM, and proposed legislation. "Building on years of important work with stakeholders, the actions we are finalizing today mark a significant step forward to increase transparency and to prevent abusive conduct within the financial system."
