US banks have begun applying the US Treasury’s new customer due diligence regime, requiring them to verify the identities of new business customers’ beneficial owners, and report them to law enforcement agencies.
The rules were finalised two years ago, under the Obama administration, after almost two years of consultation. But implementation was deferred until now, to give the banks time to implement the new system.
A beneficial owner is defined as anyone who owns 25 per cent or more of a legal entity, and any individual who controls the legal entity, but several questions remain. In particular, the rules are not easy to understand when applied to complicated ownership structures, according to US law firm Sullivan and Worcester.
The banking agencies have not published any advice, so clients and practitioners have to rely on guidance from the Treasury’s Financial Crimes Enforcement Network (FinCEN), which released a frequently asked questions document last month. This at least clarified that the customer due diligence (CDD) requirement applies whether the 25 per cent equity interests is held either directly or indirectly, no matter how complex its corporate structure or how many layers of ownership there are.
FinCEN also suggests that levels of ownership lower than 25 per cent might justify CDD in some cases, though legally the 25 per cent level is all that is required. But it says customer identification programmes should be risk-based, and a customer that presents many risks could justify going below the 25 per cent level.
Other questions relate to treatment of existing corporate customers. FinCEN now says that a bank that has already done CDD on a customer can rely on the existing information, if the customer certifies it is up-to-date. The customer can also renew its existing bank products (such as loans) by asserting that its CDD information is still current. A new bank account with the same bank, such as a sub-account for accounting or operational purposes, would generally not be a new account for CDD purposes.
The new rules are only one part of the US Treasury’s ultimate aim of bringing the US business transparency regime up to international standards. In 2016, the Treasury admitted it needs a federal law requiring that companies know and disclose their beneficial owners to the government at the time of company formation, and the absence of such a law even at state level is a longstanding weakness in the US anti-money laundering regime.