Source: https://www.gibsondunn.com/beneficial-ownership-and-customer-due-diligence-perspectives-on-the-increased-compliance-risk-associated-with-the-implementation-of-fincens-final-rule/
Timestamp: 2019-07-16 22:34:57
Document Index: 360101624

Matched Legal Cases: ['§ 666', '§ 666', '§ 445', '§ 81', '§ 1010', '§ 103', '§ 5326', '§ 1010', '§ 1002']

Gibson Dunn | Beneficial Ownership and Customer Due Diligence: Perspectives on the Increased Compliance Risk Associated with the Implementation of FinCEN's Final Rule
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) released its long-awaited final Customer Due Diligence rule (Final Rule) on May 6, 2016.[1] In response to extensive comments from the industry, the Final Rule provides covered financial institutions with two years to implement new policies and procedures required by the Final Rule.[2] FinCEN released the Final Rule as part of a larger White House announcement of legislation and regulations aimed at strengthening the legal framework for anti-money laundering and anti-corruption compliance.
In the weeks following release of the Final Rule, there was significant activity in Washington regarding the Rule and the legislation. On May 24, 2016, the U.S. House of Representatives Financial Services Committee Task Force on Terrorism Financing held a hearing on developments in terrorist financing and on the impact of the Final Rule and proposed legislation.[3] On May 16, 2016, in published remarks to the Institute of International Bankers, FinCEN heralded the process leading up to the Final Rule as an unprecedented example of collaboration between the financial services industry and the government and noted the significant incorporation of feedback from the industry into provisions of the Final Rule.[4] Notwithstanding this engagement with the industry, the Final Rule places significant new compliance burdens on covered financial institutions that the Rule justifies based on a questionable cost-benefit analysis.
In this client memorandum, we analyze the provisions of the Final Rule and recommend initial implementation steps that covered financial institutions may want to consider. We also discuss the potential impact of the companion Treasury and Justice Department legislation and an Internal Revenue Service (IRS) proposed regulation issued as part of the White House announcement.
CUSTOMER DUE DILIGENCE FINAL RULE
The Final Rule amends the Bank Secrecy Act (BSA) regulations to make explicit that customer due diligence (CDD) is a regulatory requirement. The Final Rule strengthens CDD procedures by adding a new requirement to obtain and verify the identity of beneficial owners of customers that are legal entities (Beneficial Ownership Requirement) and imposes an express requirement to conduct CDD as part of a financial institution’s existing Anti-Money Laundering (AML) program.[5] The Final Rule applies to financial institutions that currently are subject to the Customer Identification Program (CIP) regulations—banks, brokers and dealers in securities, mutual funds, and futures commission merchants and introducing brokers in commodities (Covered Financial Institutions).[6] The Final Rule is silent as to the government’s intentions regarding whether comparable requirements will be applied to other financial institutions subject to the BSA in the future. The Final Rule provides Covered Financial Institutions with two years, until May 11, 2018, to comply with the requirements of the Final Rule.[7]
The Final Rule follows the issuance of a Notice of Proposed Rulemaking (NPRM) in August 2014 and the issuance of an Advanced Notice of Proposed Rulemaking (ANPRM) in March 2012.[8] FinCEN received approximately 141 comments on the NPRM and issued the agency’s first regulatory impact analysis to weigh the potential costs and benefits.[9] As part of the ANPRM phase, FinCEN held five regional hearings to gain a better understanding of the concerns and challenges raised by the industry.[10]
According to FinCEN, the Final Rule will enhance financial transparency, safeguard the financial system against illicit use, and advance the purposes of the BSA by:
(1) enhancing the availability of beneficial ownership information to law enforcement and the federal functional regulators in investigations and regulatory examinations;
(2) increasing the ability of financial institutions and government agencies to identify the assets of terrorist organizations, money launderers, drug kingpins, proliferators of weapons of mass destruction, and other national security threats, and strengthening compliance with economic sanctions programs;
(3) helping financial institutions to assess and mitigate BSA and AML risk and comply with existing legal requirements;
(4) facilitating tax reporting, investigations, compliance, and U.S. commitments to foreign governments with respect to the Foreign Account Tax Compliance Act (FATCA);
(5) promoting consistency in the implementation and enforcement of the regulators’ expectations across financial sectors; and
(6) advancing the Treasury Department’s broad strategy to enhance financial transparency of legal entities.[11]
The timing of the issuance of the Final Rule is not surprising and is the result of intense international pressure on the United States, which has lagged behind other countries in requiring beneficial ownership information. The Financial Action Taskforce (FATF), which is the international standard-setting body for anti-money laundering compliance, is currently conducting its fourth mutual evaluation of the United States.[12] FATF expects to issue its U.S. mutual evaluation report in the fall of 2016.[13] In the previous U.S. mutual evaluation in 2006, FATF criticized the lack of a requirement for a "financial institution to look through a customer that is an entity to its beneficial owner."[14] Other countries have required collection of beneficial ownership information for many years, many with the assistance of national corporate registries that provide a means to validate beneficial ownership information.[15] The United States has committed to implement all FATF recommendations, including the recommendation related to beneficial ownership.
To achieve its objectives, the Final Rule requires Covered Financial Institutions to establish and maintain written procedures that are reasonably designed to identify and verify the beneficial owners of legal entities (unless exempted). The Final Rule also amends the AML program requirements applicable to Covered Financial Institutions in FinCEN’s regulations to make explicit certain CDD requirements and regulatory expectations and to ensure consistency with the AML program requirements issued by the Covered Financial Institutions’ federal functional regulators.
As discussed in the Final Rule, FinCEN considers a CDD program to include, at a minimum, four key elements:
(2) identifying and verifying the identity of beneficial owners of legal entity customers (i.e., the natural persons who own or control legal entities);
(4) conducting ongoing monitoring.[16]
FinCEN did not impose any changes to the BSA regulations to address the first element because the first element (the identification and verification of the identity of customers) is already addressed by existing regulations that require Covered Financial Institutions to maintain a CIP. Consistent with the CIP regulations, the Final Rule extends certain CIP provisions and regulatory guidance to the proposed Beneficial Ownership Requirement, e.g., all of the CIP exemptions to the definition of a "customer" and reliance on other financial institutions to perform CDD, and it provides additional exemptions.[17] With respect to the second element (the requirement to identify and verify the identity of beneficial owners), the Final Rule imposes the Beneficial Ownership Requirement described further below.[18] Regarding the third and fourth elements, the Final Rule makes these elements explicit within the core AML program requirements for each Covered Financial Institution in FinCEN’s BSA regulations.[19]
The Beneficial Ownership Requirement
The Final Rule requires Covered Financial Institutions to identify and verify the identity of natural persons who are the beneficial owners of a legal entity customer, subject to certain exemptions. These requirements apply to all new accounts going forward from the date of implementation of the final CDD rule; they do not apply to existing accounts unless a legal entity customer opens a new account with the financial institution.[20] Although FinCEN narrowed the requirement in response to industry concerns regarding existing accounts,[21] FinCEN recognized that financial institutions may consider identifying the beneficial owners of existing customers when updating customer information on a risk basis.[22] This risk-based approach could leave Covered Financial Institutions vulnerable to regulatory criticism for not obtaining beneficial ownership information in situations where the regulator disagrees with the financial institution’s criteria for obtaining beneficial ownership information on existing customers.
The Final Rule defines the term "beneficial owner" using a two-pronged test of ownership and control.[23] Under the ownership prong, a beneficial owner is "[e]ach individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer."[24] FinCEN recognized that a legal entity customer may be owned by one or more legal entities.[25] Financial institutions are not required to identify more than four beneficial owners. If no individual owns 25% or more of a legal entity, the financial institution is not required to identify any beneficial owner under this prong.[26]
Under the control prong, a beneficial owner is defined as "[a] single individual with significant responsibility to control, manage, or direct a legal entity customer[.]"[27] The single individual with control could be an executive officer or senior manager, including one of the positions enumerated in the definition, such as the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, a Managing Member, a General Partner, the President, the Vice President, the Treasurer, or "[a]ny other individual who regularly performs similar functions."[28] If an individual is both a 25% owner and meets the definition of control, the same individual could be identified as the "beneficial owner" under both prongs.[29]
This mechanical, two-pronged one-size-fits-all approach does not necessarily go far enough to address money laundering risk. Covered Financial Institutions must continue to understand fully the nature and purpose of the ownership structure of legal entities on a risk basis. The structure should make sense for the type of business, not be overly complex, and not be designed to obscure the true ownership.
Because the Final Rule sets forth minimum beneficial ownership requirements, a financial institution may, based on its own risk assessment, lower the percentage threshold, e.g., to 10%, for all customers or for its high-risk customers, or it may require the identification of other individuals who are not covered by the beneficial ownership definition.[30] This would be consistent with the regulators’ expectations that financial institutions apply enhanced due diligence procedures to higher-risk customers.
Under the Final Rule, a Covered Financial Institution has the option to obtain the required information (1) through the use of a standard certification form, which FinCEN provided as Appendix A to the Final Rule; or (2) through other means, including, for example, the institution’s own form.[31] Significantly, the Final Rule provides that use of the form is "optional, but it requires collection of the identical information required by the form."[32] The form requires the individual opening the account to identify the beneficial owner(s) of the legal entity customer, and to certify that the information is true and accurate to the best of that person’s knowledge.[33]
Verification of Beneficial Owners
The Final Rule only requires that financial institutions verify a beneficial owner’s identity and not the beneficial owner’s status as a beneficial owner.[34] The Final Rule’s procedures for verifying identity are identical to the risk-based procedures for verifying the identity of natural persons who open accounts under the CIP regulations, which permit verification by documentary or non-documentary methods.[35] Photocopies or other reproductions of identification are permitted, but "given the vulnerabilities inherent in the reproduction process, Covered Financial Institutions should conduct their own risk-based analyses of the types of photocopies or reproductions that they will accept . . . so that such reliance is reasonable."[36] Of note, FinCEN stated that financial institutions "may rely on the information supplied by the legal entity customer regarding the identity of the beneficial owner or owners [and the extent of their ownership or type of control], provided that it has no knowledge of facts that would reasonably call into question the reliability of such information."[37] This standard, however, could leave financial institutions open to second-guessing by regulators, or even prosecutors, if it turns out that the information is not correct.
The government appears to find utility in financial institutions collecting beneficial ownership information without verifying the information, even if the information recorded is false. Providing false information may be useful in the few instances where accounts subject to the Final Rule play a role in criminal investigations. The government also appears to be recognizing the difficulty Covered Financial Institutions would have in verifying beneficial ownership information absent a reliable corporate registry.
The Final Rule defines legal entity customers—those entities owned by beneficial owners—to include corporations, limited liability companies, or other entities that are created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entities formed under the laws of a state or of the United States or a foreign jurisdiction.[38]
The Final Rule provides for a number of exemptions from the Beneficial Ownership Requirement.[39] FinCEN did not impose a Beneficial Ownership Requirement for trusts, given the variety of possible trust arrangements and the different persons who may have roles in a trust, e.g., the settlor, the grantor, the trustee or other persons. In particular, FinCEN noted that financial institutions generally are identifying and verifying the identity of the trustee who necessarily opens the account, and that financial institutions should continue to use a risk-based approach to collecting information with respect to various persons associated with trusts in order to know their customers.[40] The Final Rule also provides guidance on intermediated account relationships and non-excluded pooled investment vehicles.[41]
The Final Rule permits financial institutions to rely on other financial institutions to conduct CDD to the same extent permitted under the CIP rules.[42] Under the CIP rules, a financial institution generally can rely on another financial institution to conduct CIP with respect to shared customers, provided that (i) reliance on the other financial institution to conduct CIP is reasonable; (ii) the other financial institution is subject to an AML program rule and is regulated by a federal functional regulator; and (iii) the other financial institution enters into a contract that requires it to certify annually that it has implemented an AML program, and that it will perform the specified requirements of the financial institution’s CIP.[43]
The Final Rule does not require financial institutions to update or refresh periodically CDD information, but it does require updating under the risk-based approach.[44] FinCEN emphasized that "the obligation to update customer information . . . is triggered only when, in the course of normal monitoring, the financial institution detects information relevant to assessing the risk posed by the customer, i.e., based on a "triggering event."[45] This is an unexpected statement because the Final Rule would not impact the expectations of bank regulators that banks conduct periodic CDD reviews on customers at set intervals based on the customer’s risk rating.
The Final Rule requires that financial institutions implement procedures for generally maintaining, for five years after the account is closed, a record of the information obtained in connection with the identification of the beneficial owners, including the beneficial ownership certification form and any other related identifying information collected.[46] Information regarding the verification of a customer’s identity must be maintained for five years after the record is made, as with the CIP requirements.[47]
The Final Rule amends the AML program rules for Covered Financial Institutions to "explicitly include risk-based procedures for conducting ongoing customer due diligence, to include understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile."[48] Specifically, the Final Rule includes in the AML program regulations a requirement that Covered Financial Institutions, at a minimum, include in their AML program:
(1) a system of internal controls to assure ongoing compliance with the BSA;
(2) the designation of an individual or individuals responsible for coordinating and monitoring day-to-day compliance with the AML program;
(3) training of appropriate personnel;
(4) independent testing of the AML program; and
(5) appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to (i) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information, including CDD information.[49]
SUGGESTIONS FOR COVERED FINANCIAL INSTITUTIONS TO CONSIDER IN IMPLEMENTING THE FINAL RULE
Current CDD practices by financial institutions vary significantly. Some financial institutions obtain beneficial ownership information routinely, while others obtain this information for only certain categories of customers or following a triggering event.[50] Practices also vary with respect to percentage of ownership thresholds and the extent of information collected.[51] Given the variation in current practices, the CDD compliance burden will be different for each financial institution. The following are general suggestions that financial institutions may want to consider for the initial phases of implementation:
Modifications to Systems: The two-year delayed implementation is critical for one of the most time-consuming aspects of any BSA/AML program — information technology (IT) systems. Financial institutions may want to consider prioritizing the assessment of current IT systems for customer on-boarding, transaction monitoring, record retention, and suspicious activity investigation and reporting.
Modifications to AML Program and Processes: Implementation will require modifications to a financial institution’s written AML program, corresponding procedures, and forms. To provide enough time for personnel training in advance of the implementation deadline, financial institutions should consider ensuring that the required modifications are made well in advance of the implementation date.
Modifications to Account Opening Processes: For financial institutions not currently collecting beneficial ownership information, the Final Rule will impact significantly account opening processes and forms. Although the Final Rule permits financial institutions to rely on the beneficial ownership information provided by the customer, a financial institution only can do so "provided that it has no knowledge of facts that would reasonably call into question the reliability of such information."[52] Consideration should be given to developing criteria for assessing the reliability of the beneficial ownership information provided, escalation procedures, and training that includes red flags.
Updating Beneficial Ownership Information and Current Accounts: The Final Rule applies only to new accounts opened after the effective applicability date, May 11, 2018. The Final Rule requires, however, financial institutions to update beneficial ownership information "based on risk, generally triggered by a financial institution learning through its normal monitoring of facts relevant to assessing the risk posed by the customer."[53] Thus, as part of implementation, financial institutions should consider their approach to, and develop procedures for, situations that will require financial institutions to obtain beneficial ownership information on existing customers after the effective date of the Final Rule.
Incorporation of Beneficial Ownership Information: The Final Rule provides several specific examples of how FinCEN expects financial institutions to incorporate beneficial ownership information into a BSA/AML program. Specifically, FinCEN expects financial institutions to fully incorporate beneficial ownership information into transaction monitoring and suspicious activity reports (SARs), and to use beneficial ownership information for purposes of enhancing Office of Foreign Assets Control (OFAC) sanctions and negative media screening, and for Currency Transaction Reporting.[54]
Threshold for Ownership: FinCEN imposed a 25 percent threshold for ownership and explicitly declined to impose a 10 percent threshold.[55] The Final Rule noted that "consistent with the risk-based approach, FinCEN anticipates that some financial institutions may determine that they should identify and verify beneficial owners at a lower threshold in some circumstances."[56] Financial institutions should consider whether a lower threshold may be appropriate for customers or products or services that could pose a higher risk.
Certification Form: In the Final Rule, FinCEN made the Certification Form optional in response to comments from some financial institutions that mandating the use and retention of a specific form would require significant technological changes that could be costly and challenging to implement for some financial institutions.[57] Financial institutions should consider in the initial phases of implementation whether they will use the Certification Form as part of CDD compliance and, if not, they should take steps to ensure that the form that they use includes all of the required information contained in the Certification Form.
Training: New processes and procedures will require training for substantial numbers of job categories within financial institutions. In establishing implementation timelines, financial institutions should build in sufficient time for classroom and on-the-job training.
Treasury Department Legislation
As part of the White House announcement, the Treasury Department submitted to Congress legislation that would amend the BSA to require the reporting of beneficial ownership information for United States entities.[58] Legislation requiring the disclosure of beneficial ownership information has been introduced in every Congressional session since 2008, but never enacted, and has been opposed by certain states, both because of the costs involved and because a number of these states generate significant revenue from incorporation fees.[59] Treasury’s proposed legislation would amend the BSA to include a section allowing the Secretary to require the maintenance of records and filing of reports with the Treasury Department relating to the beneficial owners of entities formed in the United States at the time of the company’s creation.[60] The proposed legislation addresses widespread criticism of the ability for shell companies to incorporate under U.S. state law and hide assets.[61]
The Final Rule and the beneficial ownership draft legislation dovetail together.[62] The Final Rule focuses on financial institutions knowing who their legal entity customers are, regardless of where those entities are formed, as part of due diligence at the time of account opening, but the information provided may not be reliable, and may be impossible to verify given the lack of requirements for states to maintain reliable, verified, and up-to-date corporate formation information.[63] The proposed legislation focuses on ensuring that legal entities formed in the United States are more transparent to law enforcement regardless of where they conduct their financial activity.[64]
Not directly related to the beneficial ownership issue, the second part of the U.S. Treasury’s proposed legislation amends the BSA’s section authorizing Geographic Targeting Orders (GTOs).[65] A GTO is an order issued by FinCEN to require enhanced recordkeeping and reporting requirements in a particular geographic area for a defined period of time.[66] The amendments would expand FinCEN’s GTO authority to permit such orders to require reporting on transactions that do not involve a monetary instrument (cash, certain types of checks, and money orders), such as transactions conducted through wire transfers.[67] Over the last several years, FinCEN has issued public GTOs in a number of geographic areas targeting a range of money laundering typologies, including trade-based money laundering, money laundering through real estate, and drug trafficking across the southwest border of the United States.[68] In January 2016, FinCEN issued GTOs requiring certain U.S. title insurance companies to record and report the beneficial ownership information of legal entities making "all cash" or "non-mortgaged" purchases of high-value residential real estate in Manhattan and in Miami-Dade County, Florida.[69] In Congressional testimony in late May 2016, FinCEN’s Director explained that the GTO statute’s limitation on collecting wire transfer information impacted the effectiveness of the real estate GTO.[70]
Justice Department Legislation
As part of the White House announcement, the Department of Justice also submitted to Congress proposed legislation aimed at strengthening U.S. capabilities to combat corruption.[71] The proposed legislation targets cross-border international corruption, and amends the substantive offense, 18 U.S. § 666, criminalizing theft or bribery in connection with programs receiving federal funds.[72] In 2010, the Department of Justice launched the Kleptocracy Asset Recovery Initiative, in coordination with the FBI and other federal agencies, which seeks to forfeit the proceeds of corruption by foreign officials.[73] The Justice Department’s proposal is the latest step toward achieving the goals of the Kleptocracy Asset Recovery Initiative. The legislation includes:
(1) Expanding money laundering predicates to include any violation of non-U.S. law that would be a money laundering predicate if committed in the United States.[74] This amendment will allow prosecutors to prosecute kleptocracy directly and prosecute money laundering linked to a broader set of crimes, by allowing them to prosecute, for example, the laundering of proceeds linked to the foreign corruption activities criminalized in the 2003 U.N. Convention Against Corruption.[75]
(2) Allowing investigators to obtain administrative subpoenas for money laundering investigations.[76] Amending Section 3486 of Title 18, United States Code, this proposal would allow for administrative subpoenas in cases "against a foreign nation constituting specified unlawful activity" or certain "criminal or civil forfeiture."[77] The administrative subpoena process is significantly faster and bypasses the judicial oversight embedded in the grand jury subpoena process.
(3) Enhancing investigators’ access to foreign bank or business records by allowing service of subpoenas on those entities’ branches situated in the United States, regardless of the bank secrecy or privacy laws in foreign jurisdictions.[78] Current law permits U.S. law enforcement, with approval from the Department of Justice, to attempt to obtain bank records located abroad by serving subpoenas on branches of the bank located in the United States, even where production of the records would violate the foreign country’s bank secrecy or data protection laws. However, obtaining such records as legally admissible evidence can still result in protracted negotiation and litigation, which can ultimately prevent law enforcement from obtaining those records. This proposed amendment will enhance the ability of U.S. investigators to obtain overseas records as a form of legally admissible evidence.[79]
(4) Creating a mechanism to use and protect classified information in civil asset recovery cases analogous to what is used in criminal cases under the Classified Information Procedures Act (CIPA).[80]
(5) Aligning the period of time the government can restrain property based on a request from a foreign country to that permitted in the domestic context (from 30 days to 90 days).[81] The proposal would give foreign governments up to 90 days to show probable cause why assets in the United States should be frozen and ultimately forfeited under the Kleptocracy Asset Recovery Initiative. The proposal would also allow prosecutors to use foreign business records in civil asset recovery cases, provided there is a certificate attesting that those records meet the business records test—a mechanism that already exists in the criminal context.[82]
(6) Resolving a current circuit split over whether 18 U.S.C. § 666, which criminalizes payments to influence or reward agents of entities receiving more than $10,000 in federal funds per year, is solely a bribery statute, or whether it criminalizes gratuities as well. Federal prosecutors rely on this statute heavily to prosecute local corruption cases. The legislation would resolve the split by expressly criminalizing the corrupt offer or acceptance of payments to "reward" official action as well as those intended to "influence" official action,[83] thereby including gratuities in the definition of criminal conduct.
The package of provisions announced by the White House will have a significant impact on financial institutions, just by virtue of the Final Rule alone.[84] The election year may impact the likelihood of the Treasury and Justice Department legislative proposals becoming law in this Congressional session. In addition, as noted above, states will likely continue to oppose vigorously the Treasury legislation. And, even if the beneficial ownership legislation were passed, it would likely take years to come into force and for there to be a viable way for financial institutions to verify beneficial ownership information. We will continue to monitor developments arising from the Final Rule and related legislative provisions and update clients accordingly.
[1] Final Rule, Customer Due Diligence Requirements for Financial Institutions, 81 Fed. Reg. 29398 (May 11, 2016) (to be codified at 31 C.F.R. pts. 1010, 1020, 1023, 1024, 1026), available at https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf.
[2] Id. at 29428.
[3] See Press Release, U.S. House of Reps., Fin. Servs. Committee, Task Force Examines Federal Efforts to Combat Terror Financing (May 24, 2016), available at http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=400712.
[4] Published Remarks of Jamal El-Hindi, Deputy Director, Financial Crimes Enforcement Network (FinCEN), U.S. Treasury Department, Institute of International Bankers Anti-Money Laundering Seminar (May 16, 2016), available at https://www.fincen.gov/news_room/speech/html/20160518.html.
[5] 81 Fed. Reg. 29398.
[6] Id. at 29446 & n.170.
[7] Id. at 29398.
[8] Id. at 29402.
[9] Id. at 29402, 29450; see also Published Remarks of Jamal El-Hindi, Deputy Director, Financial Crimes Enforcement Network (FinCEN), U.S. Dept. of Treas., Institute of International Bankers Anti-Money Laundering Seminar (May 16, 2016), available at https://www.fincen.gov/news_room/speech/html/20160518.html.
[10] 81 Fed. Reg. 29398, 29402.
[11] Id. at 29399-400.
[12] Financial Action Taskforce Mutual Evaluation Calendar, available at http://www.fatf-gafi.org/home/.
[14] Financial Action Task Force, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism §§ 445-55 (June 23, 2006), available at
http://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20US%20full.pdf.
[15] The European Union (EU) member states have long since adopted AML beneficial owner identification rules in accordance with the EU’s Third Anti-Money Laundering Directive. The Third AML Directive was adopted in 2005 and mandates, inter alia, that EU Member States adopt CDD measures that include identifying and verifying beneficial owners of legal entities. See Directive 2005/60/EC of the European Parliament and of the Counsel of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, 2005 O.J. (L309) 23-24. These CDD measures were retained and enhanced in the EU’s May 2015 Fourth Directive, which member states must implement by June 26, 2017. See Directive (EU) 2015/849 of the European Parliament and of the Counsel of 20 May 2015 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, 2015 O.J. (L 141) 91-93, 111. The EU’s Fourth Directive also requires that member states create central repositories of the beneficial ownership information of all companies and legal entities incorporated in each State. Id. at 96-97. EU member states must adopt this provision by June 26, 2017, id. at 111, and several European countries, including the UK, Norway, and Denmark, have already done so. Sophie Haggerty, "Norway Latest Country to Adopt Public Registry of Beneficial Ownership," Global Financial Integrity, available at http://www.gfintegrity.org/norway-latest-country-to-adopt-public-registry-of-beneficial-ownership/ (last visited June 30, 2016); see also Small Business, Enterprise and Employment Act, 2015, c. 26, § 81, sch. 3. However, as the British government will now be embarking on a review of all EU-derived legislation to determine what will survive post Brexit, it is now unclear what the UK’s anti-money laundering regime will look like in the future.
[16] 81 Fed. Reg. 29398, 29399.
[17] Id. at 29451-53.
[19] Id. at 29457.
[20] Id. at 29404.
[22] Id. at 29449.
[23] Id. at 29451-53.
[25] Id. at 29452.
[31] Id. at 29405; see also 81 Fed. Reg. 29398, 29454-57 (to be codified at 31 C.F.R. § 1010.230, App. A (Standard Certification Form)).
[32] 81 Fed. Reg. 29398, 29405.
[34] Id. at 29407.
[36] Id. at 29408.
[37] Id. at 29407.
[38] Id. at 29452.
[40] 81 Fed. Reg. 29398, 29412.
[41] Id. at 29415.
[42] Id. at 29398.
[43] 31 C.F.R. § 103.121(b)(6).
[44] 81 Fed. Reg. 29398, 29421.
[46] Id. at 29452.
[47] Id. at 29453.
[48] Id. at 29398.
[49] The amended program regulations also include compliance with regulations issued by the Federal functional regulator governing the institutions program. See 81 Fed. Reg. 29398, 29457-29458.
[50] 81 Fed. Reg. 29398, 29401.
[52] Id. at 29407.
[53] Id. at 29399, 29410.
[54] Id. at 29409.
[55] Id. at 29410.
[57] Id. at 29405.
[58] Proposed Legislation, U.S. Dept. of Treas., FinCEN, Amending the Bank Secrecy Act to Require Reporting and Recordkeeping on Beneficial Ownership of Legal Entities, available at https://www.treasury.gov.
[59] Press Release, Transparency Intl., House and Senate introduce legislation promoting transparency in beneficial ownership of companies (Feb. 3, 2016), availablehere.
[60] Press Release, U.S. Dept. of Treas., FinCEN, Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion (May 5, 2016), available at https://www.treasury.gov/press-center/press-releases/Pages/jl0451.aspx.
[61] See Letter, Treasury Secretary Jacob J. Lew to House Speaker Paul D. Ryan (May 5, 2016), available at https://www.treasury.gov/press-center/press-releases/documents/Lew%20to%20Ryan%20on%20CDD.pdf; see also Press Release, CNNMoney, These U.S. companies hide drug dealers, mobsters and terrorists (Dec. 9, 2015), available at http://money.cnn.com/2015/12/09/news/shell-companies-crime/ ("But despite repeated bills from lawmakers to eliminate this secrecy, Congress has yet to take action, leaving the United States far behind other countries when it comes to identifying criminal enterprises.").
[62] See Stopping Terror Finance: A Coordinated Government Effort: Hearing Before the H. Comm. on Fin. Servs., 114th Cong. 2016 WL 2986440 (May 24, 2016) (statement of J. S. Calvery, Director, FinCEN, U.S. Dept. of Treas.).
[65] Proposed Legislation, U.S. Dept. of Treas., FinCEN, Amending the Bank Secrecy Act to Require Reporting and Recordkeeping on Beneficial Ownership of Legal Entities, available at https://www.treasury.gov/.
[66] 31 U.S.C. § 5326; 31 C.F.R. § 1010.370.
[67] Proposed Legislation, U.S. Dept. of Treas., FinCEN, Amending the Bank Secrecy Act to Require Reporting and Recordkeeping on Beneficial Ownership of Legal Entities, available at https://www.treasury.gov/.
[68] Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Renews and Broadens Geographic Targeting Orders on Border Cash Shipments in California and Texas (Aug. 7, 2015), available at https://www.fincen.gov/news_room/nr/html/20150807.html; Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Combats Stolen Identity Tax Refund Fraud in South Florida with Geographic Targeting Order (July 13, 2015), available at https://www.fincen.gov/news_room/nr/html/20150713.html; Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Targets Money Laundering Infrastructure with Geographic Targeting Order in Miami (Apr. 21, 2015), available at https://www.fincen.gov/news_room/nr/html/20150421.html; Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Issues Geographic Targeting Order Covering the Los Angeles Fashion District as Part of Crackdown on Money Laundering for Drug Cartels (Oct. 2, 2014), available at https://www.fincen.gov/news_room/nr/html/20141002.html.
[69] Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami, "Geographic Targeting Orders" Require Identification for High-End Cash Buyers (Jan. 13, 2016), available at https://www.fincen.gov/news_room/nr/html/20160113.html.
[70] See Stopping Terror Finance: A Coordinated Government Effort: Hearing Before the H. Comm. on Fin. Servs., 114th Cong. 2016 WL 2986440 (May 24, 2016) (statement of J. S. Calvery, Director, FinCEN, U.S. Dept. of Treas.).
[71] Press Release, Dep’t of Justice, Justice Department Proposes Legislation to Advance Anti- Corruption Efforts (May 5, 2016), available at https://www.justice.gov/opa/pr/justice-department-proposes-legislation-advance-anti-corruption-efforts.
[72] Id.; see also U.S. Attorneys’ Manual, Title 9: Criminal Resource Manual, § 1002 (Theft and Bribery in Federally Funded Programs).
[73] Comments by Eric Holder, Attorney General, African Union Summit (July 25, 2010), available at https://www.justice.gov/opa/speech/attorney-general-holder-african-union-summit.
[74] Dept. of Justice, Anti-Corruption Legislative Proposals to the 114th Cong., 2 (May 10, 2016), available at https://www.justice.gov/opa/file/849986/download.
[75] Id. at 9.
[83] Id at 11.
[84] The White House also announced an IRS notice of proposed regulation with the stated intention of "provid[ing] the IRS with improved access to information that it needs to satisfy its obligations under U.S. tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws." Specifically, the proposed rule would require foreign-owned entities classified as "disregarded entities" for federal income tax purposes to obtain an employer identification number (EIN) (if they are not already required to), as well as to file a Form 5472 for each "reportable transaction," defined broadly in the Treasury Regulations to include, among other things, contributions, distributions, and transactions between the entity and the foreign owner. Disregarded entities would also be required to maintain books and records sufficient to substantiate the reported transactions and other U.S. tax treatment of the entity. Existing civil and criminal penalties for failure to meet these requirements would extend to disregarded entities. See Treatment of Certain Domestic Entities Disregarded as Separate From Their Owners as Corporations for Purposes of Section 6038A, 81 Fed. Reg. 28,784 (May 10, 2016).
By way of background, Sections 301.7701-1 through 301.7701-3 of the Treasury Regulations (entity classification regulations) allow an eligible business entity with a single owner to elect to be classified as either a disregarded entity (an entity disregarded as separate from its owner for federal income tax purposes) or as an association taxable as a corporation. When an entity is classified as a partnership or corporation, the IRS obtains information about the entity through return filing and information obtained when the entity applies for and maintains an EIN. Certain disregarded entities, on the other hand, are not subject to those requirements; as such, the IRS can only obtain information about these disregarded entities if it is included in the owner’s personal return filings (assuming the owner is required to file returns). Under current law, where the owner of a disregarded entity is foreign, it is possible that the IRS will not obtain any information about the disregarded entity. The stated intent of the proposed regulation is to close this "loophole" in U.S. law. See Press Release, U.S. Dept. of Treas., FinCEN, Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion (May 5, 2016), available at https://www.treasury.gov/press‑center/press-releases/Pages/jl0451.aspx.
The following Gibson Dunn lawyers assisted in the preparation of this client alert: Stephanie Brooker, Joel Cohen, Arthur Long, Amy Rudnick, Linda Noonan, Mark Handley, Mehrnoosh Aryanpour, Courtney Brown, Ella Capone, Jesse Melman, Masha Bresner, Eric Veres and Melissa Goldstein.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s Financial Institutions and White Collar practice groups:
Linda Noonan - Washington, D.C. (+1 202–887–3595, lnoonan@gibsondunn.com)