U.S. Treasury issues CDD Final Rule requiring banks to identify shell company beneficial owners


The Obama administration is issuing a long-delayed rule requiring the financial industry to identify the real owners of companies and proposing a bill that would require companies to report the identities of their owners to the federal government, U.S. officials said on Thursday.

The Customer Due Diligence (CDD) rule, in the works since 2012, and the proposed legislation are meant to hinder criminals from using shell companies to hide ownership and launder money, finance terror, and commit other threats to the global financial system.

CDD Final Rule
The CDD Final Rule adds a new requirement that financial institutions – including banks, brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities – collect and verify the personal information of the real people (also known as beneficial owners) who own, control, and profit from companies when those companies open accounts.  The Final Rule also amends existing Bank Secrecy Act (BSA) regulations to clarify and strengthen obligations of these entities. 
The CDD Final Rule harmonizes BSA regulations and makes explicit several components of customer due diligence that have long been expected under existing regulations, as well as  incorporating a new requirement for covered financial institutions to collect beneficial ownership information.  Specifically, the rule contains three core requirements: (1) identifying and verifying the identity of the beneficial owners of companies opening accounts; (2) understanding the nature and purpose of customer relationships to develop customer risk profiles; and (3) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.  With respect to the new requirement to obtain beneficial ownership information, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity.  Based upon comments received in response to the proposed rule that was published in August 2014, the final rule extends the proposed implementation period from one year to two years, expands the list of exemptions, and makes use of a standardized beneficial ownership form optional as long as a financial institution collects the required information.
The CDD Final Rule advances the BSA by making available to law enforcement valuable information needed to disrupt illicit finance networks.  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. 
Beneficial Ownership Legislation
Also today, Treasury announced it is sending beneficial ownership legislation to Congress.  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.  As part of the legislation outlined today, companies formed within the United States would be required to file beneficial ownership information with the Treasury Department, and face penalties for failure to comply.  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 new draft legislation is an amended version of an Administration Budget proposal, reflecting discussions with Congress, law enforcement entities, and others.
The proposed legislation also contains technical amendments to the current Geographic Targeting Order (GTO) authority which would clarify FinCEN’s ability to collect information under GTOs, such as bank wire transfer information. The most recent GTOs temporarily require certain U.S. title insurance companies to record and report the beneficial ownership information of legal entities making “all-cash” purchases of high-value residential real estate.  All-cash purchases may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties so these GTOs assist the U.S. government in better understanding potential illicit finance vulnerabilities in our real estate sector.  This January, FinCEN issued GTOs focused on the Borough of Manhattan in New York City, New York, and Miami-Dade County, Florida.  FinCEN intends to evaluate the information it gains from these GTOs and determine what next steps would best protect the U.S. financial system from criminal abuse.  Options could include broadening the GTOs to other areas, or using the information to inform a more comprehensive rulemaking.
Foreign-Owned Single-Member LLC Proposed Regulations
Treasury also announced proposed regulations to require foreign-owned “disregarded entities,” including foreign-owned single-member limited liability companies (LLCs), to obtain an employer identification number (EIN) with the IRS. Overall, our federal tax system has very strong information reporting requirements for most types of entities formed in the United States.  These requirements allow the IRS to determine whether there is any federal tax liability and if so, how much, and to share information with other tax authorities as appropriate. However, there is a narrow class of foreign-owned U.S. entities – typically single member LLCs– that have no obligation to report information to the IRS or to get a tax identification number. These "disregarded entities” can be used to shield the foreign owners of non-U.S. assets or non-U.S. bank accounts. Once these regulations are finalized, they will allow the IRS to determine whether there is any tax liability, and if so, how much, and to share information with other tax authorities. This will strengthen the IRS’s ability to prevent the use of these entities for tax avoidance purposes, and will build on the success of other efforts to curb the use of foreign entities and accounts to evade U.S. tax.

The use of shell companies to hide assets and avoid taxes is in the spotlight following a massive leak of data from the Panama-based law firm Mossack Fonseca, which embarrassed several world leaders and sparked government investigations around the globe into possible financial wrongdoing by the wealthy elite. The International Consortium of Investigative Journalists said it will release a searchable database of more than 200,000 offshore entities next week.

"Fundamentally our financial system should not provide the rich, the powerful, and the corrupt with the opportunity to shield their assets," said Wally Adeyemo, the U.S. deputy national security advisor for international economics, in a call with reporters on Thursday. "Nobody should be able to hide in the shadows from their legal obligations."

The final CDD rule will require banks, brokers, mutual funds and other financial institutions to collect and verify the identities of the real people, or "beneficial owners," who own and control companies when those companies open accounts.

Financial institutions will have to verify the identity of any person or company who owns more than 25 percent of the company, and one live person who controls the company even if that person owns less than 25 percent.

Banks will have two years to get their systems into compliance, said Jennifer Fowler, the U.S. Treasury deputy assistant secretary for terrorist financing.

The U.S. Treasury said in 2012 it planned to propose a rule that would clarify and standardize financial institutions' obligations to know the identities of their customers.

But the proposal generated opposition from the financial industry, which argued it would be costly, ineffective, and difficult to implement because the United States lacks a national database of corporate information.

To address one of those industry concerns, Treasury will propose legislation requiring companies to report to the Treasury the identity of beneficial owners when a company is incorporated. The legislation would create a central registry of beneficial ownership, something the U.S. currently does not have, Fowler said.

U.S. secretaries of state have lobbied against similar legislative action in the past, arguing that the Internal Revenue Service already has corporate ownership records that it could make available to law enforcement.

Adeyemo said the Obama administration had been "consulting actively" with secretaries of state. "This is a place where we need Congress to act," he said.

Taken together, the measures would make the financial system more transparent and close loopholes that allow for abuse or illegal activity, officials said.

More than 1,000 prosecutions are brought each year in the United States for money laundering, Fowler said. "This is a record that no one in the world can match."

But, she added, "there are vulnerabilities that we need to address in order to maintain an effective regime."

The Treasury is also proposing a regulation that would increase requirements for some foreign-owned companies operating in the United States to report information to the government, which officials said would prevent the use of those companies for tax avoidance purposes.

In addition, the Justice Department is proposing amendments that would strengthen its ability to pursue foreign corruption cases, including issuing subpoenas for records in money laundering investigations, obtaining overseas records, and using classified information in civil cases.

(By Yeganeh Torbati in Washington and Elizabeth Dilts in New York)