On May 11, the U.S. Treasury Department published a long-pending anti-money laundering rule. Through this rule, the Financial Crimes Enforcement Network (FinCEN), the Treasury arm that issued the rule, has extended the obligations of financial institutions to conduct due diligence on customers.
This rule is directly related to the “Panama Papers” – a recently-revealed huge cache of documents showing how rich and powerful individuals have moved and hidden wealth, sometimes legally and sometimes less so – and to other concerns about financial transparency.
The new Customer Due Diligence (CDD) rule generally requires that, beginning on May 11, 2018 (two years after publication of the rule), “covered financial institutions” must obtain and verify “beneficial ownership” information for customers that are legal entities.
The “covered financial institutions” that now face these obligations are banks, brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities. What are the implications for these institutions?
Before the issuance of the CDD rule, a bank could open an account for the legal entity “Anonymous LLC,” for example, after obtaining information only about that legal entity. In many instances financial institutions could meet their compliance obligations by obtaining only the name, address, and identification number for Anonymous LLC and verifying the accuracy of that information.
No more. Covered financial institutions now generally are required to obtain information regarding any individual who owns, whether directly or indirectly, 25% or more of the legal entity. The information the financial institution must obtain includes the beneficial owner’s name, date of birth, address, and social security number or passport number/country of issuance. The same information is required for at least one individual who controls or manages the legal entity (who might also be a beneficial owner). The financial institution also must take reasonable steps to verify the accuracy of the information obtained about each beneficial owner.
Those fearing overwhelming complexity and burden in the beneficial ownership requirements may take some solace from an appendix to the rule: to facilitate uniformity and reduce compliance burdens, the CDD rule includes a form for use in obtaining and verifying beneficial ownership information; that form is to be signed by the individual opening the account for a legal entity.
The CDD rule also clarifies two obligations that, in FinCEN’s view, were implicit in pre-existing anti-money laundering obligations for financial institutions. These pre-existing obligations include requirements that financial institutions must establish anti-money laundering programs, obtain information regarding each customer that opens a new account (e.g., name, address, and identification number for the legal entity Anonymous LLC), and file suspicious activity reports when warranted. The new CDD rule states that the pre-existing rules imply that each covered financial institution must: (i) develop a risk profile for each customer; and (ii) monitor the customer relationship to facilitate proper reporting of suspicious activities. Whether fairly implied or not, these dual obligations are now explicit and are in addition to the beneficial ownership obligations.
Generally speaking, the foreign operations of foreign financial institutions are not subject to the CDD rule, but operations in the United States may be covered – for example, the U.S. branch of a foreign bank is subject to the CDD rule (i.e., the U.S. branch is considered a “covered financial institution”).
Further, the rule invokes several commitments to financial transparency that have been made by the United States in international forums, and it also cites progress by other countries toward transparency as impetus for the CDD rule. Through the issuance of the rule, FinCEN seeks to follow and promote international trends toward requiring greater financial transparency. Because many countries model U.S. implementation, foreign financial institutions should be cognizant of the CDD rule, even if it does not directly apply to them.
The issuance of the CDD rule is a capstone for the tenure of Jennifer Shasky Calvery, who will be resigning at the end of May 2016 as the FinCEN Director. Her tenure has been an active one: as we’ve previously reported, FinCEN recently has expanded anti-money laundering regulation and enforcement to a broader range of financial institutions, issued Geographic Targeting Orders to facilitate transparency in certain non-financial business sectors (especially real estate), and aggressively cracked down on foreign banks and jurisdictions that are designated to be of “primary money laundering concern.” The last of these efforts has sparked a courtroom battle, with one of the designated foreign banks arguing that FinCEN has played fast and loose with certain procedural requirements, allegedly denying the bank fair opportunity to affect FinCEN’s actions.
But the CDD rule is at the other end of the continuum of stakeholder engagement: it is the product of more than four years of dialog with stakeholders. And its primary effect – requiring financial institutions to conduct due diligence on the beneficial owners of customers that are legal entities, and thereby precluding anonymity across a broad swath of financial relationships – is likely to be profound and global.