On May 5, the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of Treasury, announced a number of actions to address critical vulnerabilities in the US financial system.1

These measures, which include a Customer Due Diligence (CDD) Final Rule, as well as a number of proposed legislations and regulations, were issued with specific regard to the identification and verification of beneficial owners of legal entity customers. These efforts are intended to help law-enforcement pursue money laundering and corruption cases, as well as close loopholes that could allow foreign citizens to evade US taxes.2

What is the CDD Final Rule?3

The CDD Final Rule, which was proposed in 2014 and gained traction after the leak of the Panama Papers, requires financial institutions to collect and verify the name of one individual with significant responsibility to control or manage the company and all beneficial owners with a 25 percent or larger ownership of legal entity customers at the time of account opening. If no beneficial owner with a 25 percent or greater interest is identified, the controlling individual will be the manager of the legal entity. The rule is comprised of three key components:

  1. The identification and verification of beneficial owners of companies opening accounts
  2. Understanding of the nature and purpose of customer relationships to develop customer risk profiles
  3. Ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information

What is the impact of the CDD Final Rule on financial institutions?

The rule has been designed to prevent criminals’ or terrorists’ use of anonymous firms to move funds undetected and requires financial institutions to know and keep records of the individuals behind their legal entity customers.4

Financial institutions will have two years to comply with the CDD Final Rule.5 The road to compliance may in our view require financial institutions to invest heavily in talent management to support the ongoing and remediation efforts targeting existing customers with sufficiently staffed and appropriately trained employees. Institutions may also need to invest more in their current technical architecture so that the systems in use are better able to effectively and efficiently manage the strain of the remediation efforts, combined with new account openings and ongoing CDD activities.

What other legislation and regulation may be issued next?

Proposed Beneficial Ownership Legislation

To further strengthen financial transparency, FinCEN has proposed legislation that would require companies to know and report accurate beneficial ownership information at the time of entity incorporation. This legislation would create a central registry of beneficial ownership, which the US does not currently have. Failure to comply would result in penalties by the US Department of Treasury.6

Proposed Regulations for Foreign-Owned US Entities

FinCEN has also proposed regulations that would increase requirements for some foreign-owned companies operating in the US to obtain an employer identification number (EIN) from the IRS and report information to the government.7 These requirements should help prevent the use of such companies, typically single member LLCs, for tax avoidance purposes.

References

  1. “Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion,” Press Release, U.S. Department of the Treasury, May 5, 2016. Access at: https://www.treasury.gov/press-center/press-releases/Pages/jl0451.aspx
  2. “Lew to Ryan on CDD.” Letter to The Honorable Paul D. Ryan. May 5, 2016. Lew to Ryan on CDD. Department of the Treasury, n.d. Access at: https://www.treasury.gov/press-center/press-releases/Documents/Lew%20to%20Ryan%20on%20CDD.PDF.
  3. “Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion,” Press Release, U.S. Department of the Treasury, May 5, 2016. Access at: https://www.treasury.gov/press-center/press-releases/Pages/jl0451.aspx
  4. “Obama Administration Adopts Rule to Fight Money Laundering, Tax Evasion.” Wall Street Journal, May 5, 2016. Access at: http://www.wsj.com/articles/obama-administration-adopts-rule-to-fight-money-laundering-tax-evasion-1462496401.
  5. “U.S. issues rule requiring banks to identify shell company owners.” Reuters, May 5, 2016. Access at: http://www.reuters.com/article/us-usa-regulations-finance-idUSKCN0XX02O.
  6. “Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion,” Press Release, U.S. Department of the Treasury, May 5, 2016. Access at: https://www.treasury.gov/press-center/press-releases/Pages/jl0451.aspx
  7. Ibid

Newsletter Authors: Samantha Regan, Yvonne Fung

Newsletter Contact Person: Samantha Regan

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

Disclaimer

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