On March 5, 2010, the Financial Crimes Enforcement Network ("FinCEN"), along with six other federal regulatory bodies1, issued joint guidance2 (the "Guidance") to clarify and consolidate those regulators' expectations regarding financial institutions' obligations to obtain beneficial ownership3 information relating to certain customer accounts and relationships in connection with the Bank Secrecy Act ("BSA") and the Anti-Money Laundering ("AML") compliance program (referred to jointly as "BSA/ AML"). The Guidance is based on the premise that information on beneficial ownership in account relationships provides a significant tool for financial institutions to better understand and address money laundering and terrorist financing risks, protect themselves from criminal activity, and assist law enforcement with investigations and prosecutions.4 Identifying the beneficial owner(s) of some legal entities may be challenging, as the characteristics of these entities may shield the identity of the true owners, but that identification may be important in detecting suspicious activity and in providing useful information to law enforcement.
The Guidance highlights that significant risks can arise with respect to beneficial owners of accounts because nominal account holders can enable individuals and business entities to conceal the identity of the true owner of assets or property derived from or associated with criminal activity; and that criminals, money launderers, tax evaders, and terrorists may exploit the privacy and confidentiality associated with some business entities, such as shell companies and other vehicles designed to conceal the nature and purpose of illicit transactions and the identities of the persons associated with them.
For purposes of BSA/AML compliance, the term financial institution includes banks, thrifts agencies or branches of a foreign bank in the United States, credit unions, savings association, certain trust banks, trust companies, broker-dealers, futures commission merchants, commodities introducing brokers and certain investment companies, as well as other entities such as insurance companies to the extent that their products and operations include securities brokerage and investment company operations.5
The Guidance notes that the cornerstone of a strong BSA/AML compliance program is the adoption and implementation of internal controls; and that the requirement that a financial institution know its customers and the risks presented by its customers is basic and fundamental to the development of an effective BSA/AML compliance program. The Guidance highlights the importance of Customer Identification Programs ("CIPs") that enable a financial institution to form a reasonable belief that it knows the true identity of each customer, particularly those that present a high risk for money laundering or terrorist financing. The Guidance recommends that financial institutions reevaluate their CIPs and expand customer due diligence ("CDD") and enhanced due diligence ("EDD") policies and procedures in an effort to assure that they will be effective in identifying the beneficial owners of an account where appropriate.
Customer Due Diligence Procedures
A financial institution's CDD processes should be designed to be commensurate with the institution's BSA/AML risk, with particular emphasis on high-risk customers. Stated another way, CDD processes should be developed to identify customers who pose heightened money laundering or terrorist financing risks, and as the perceived risk profile represented by any given customer increases so should the rigors imposed by the institution's CDD processes.
The Guidance cites the following as examples of appropriate CDD procedures:
- Determining whether the customer is acting as an agent for or on behalf of another, and if so, obtaining information regarding the capacity in which and on whose behalf the customer is acting.
- Where the customer is a legal entity that is not publicly traded in the United States, such as an unincorporated association, a private investment company, trust or foundation, obtaining information about the structure or ownership of the entity so as to allow the institution to determine whether the account poses heightened risk.
- Where the customer is a trustee, obtaining information about the trust structure to allow the institution to establish a reasonable understanding of the trust structure and to determine the provider of funds and any persons or entities that have control over the funds or have the power to remove the trustees.
In addition, those accounts that have been identified as posing a heightened risk pursuant to CDD procedures should be subjected to an EDD program that is reasonably designed to enable compliance with the requirements of the BSA. The Guidance does not identify specific procedures for an EDD program, but states that such procedures may include steps, in accordance with the level of risk presented, to identify and verify beneficial owners, to reasonably understand the sources and uses of funds in the account, and to reasonably understand the relationship between the customer and the beneficial owners.
The Guidance identifies certain trusts, corporate entities, shell entities and personal investment companies as examples of customers that may pose heightened risk. Both CDD and EDD information should be used for monitoring purposes for discrepancies between an account's intended purpose and expected activity and the actual sources of funds and uses of the account. To encourage cost effectiveness, enhance efficiency, and increase availability of potentially relevant information, the Guidance suggests financial institutions crosscheck for information in data systems maintained within the financial institution for other purposes, such as credit underwriting, marketing or fraud detection.
Private Banking Accounts
Covered financial institutions must establish and maintain a due diligence program that is reasonably designed to detect and report known or suspected money laundering or suspicious activity conducted through or involving "private banking accounts"6 that are established, maintained, administered or managed in the United States. A financial institution's failure to take reasonable steps to identify the nominal and beneficial owners of an account may constitute a violation of the requirements of applicable law.7
As part of their due diligence program, financial institutions that offer private banking services must take reasonable steps to, among other things:
- Ascertain the source(s) of the customer's wealth and the anticipated activity of the account, as well as potentially take into account the geographic location, the customer's corporate structure, and public information.
- Identify nominal and beneficial owners of private banking accounts.
- Determine whether the nominal or beneficial owners are senior foreign political figures ("SFPF").8
Special rules apply for those owners identified as SFPF. The Guidance notes that financial institutions should take reasonable steps to ascertain the status of a nominal or beneficial owner as a senior foreign political figure. Theses steps may include obtaining information on employment status and sources of income, as well as consulting news sources and checking references.
Foreign Correspondent Accounts
Covered financial institutions9 are required to establish a due diligence program that includes appropriate, specific, risk-based, and, where necessary, enhanced policies, procedures and controls that are reasonably designed to detect and report, on an ongoing basis, any known or suspected money laundering activity conducted through or involving any "correspondent account"10 established, maintained, administered, or managed in the United States for a foreign financial institution.11
EDD procedures are required for correspondent accounts established, maintained, administered, or managed in the United States, for foreign banks12 that operate under: (i) an offshore banking license; (ii) a banking license issued by a country that has been designated as non-cooperative with international anti-money laundering principles or procedures; or (iii) a banking license issued by a country designated by the Secretary of the Treasury (under delegation to the Director of FinCEN, and in consultation with the Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission) as warranting special measures due to money laundering concerns.
As stated in the Guidance, EDD for correspondent accounts for foreign banks should be risk based. A covered financial institution's risk-based EDD should obtain information from the foreign bank about the identity of any person with authority to direct transactions through any correspondent account that is a payable-through account13, as well as the source and beneficial owner of funds or other assets in a payable-through account.
The Guidance suggests that covered financial institutions use a questionnaire or review transaction history for the foreign bank to collect necessary information.
FinCEN regulations prohibit covered financial institutions from opening and maintaining correspondent accounts for foreign shell banks14. In order to ensure the account is not being used to indirectly provide banking services to foreign shell banks, covered financial institutions must identify the owners of foreign banks whose shares are not publicly traded and record the name and address of a person in the United States that is authorized to be an agent to accept service of legal process.
The Guidance informs covered financial institutions that a failure to maintain records identifying the owners of non-publicly traded foreign banks could be viewed as a violation of the requirements of applicable law15.
Implications
The Guidance does not purport to promulgate new law; however, it does clarify certain steps that financial institutions must take to ensure that they comply with BSA/AML regulatory requirements with respect to the acquisition and retention of beneficial ownership information. It is clear from the Guidance, that the eight federal regulators that participated in the release have substantial concerns that the procedures implemented by a large number of financial institutions may not adequately implement the requirements of applicable law. The penalties for financial institutions that fail to comply with the law are often severe and can be imposed by numerous primary regulators. For example, in February 2009, the Securities and Exchange Commission sanctioned Ferris, Baker Watts, Inc. ("Ferris") for supervisory failures in its AML procedures that arose in connection with an alleged scheme to manipulate stock and for failure to file a Suspicious Activity Report, commonly known as an SAR. In that case, the Securities and Exchange Commission ordered disgorgement of certain payments received by Ferris and imposed a civil monetary penalty in the amount of $500,000.16 Given the potential consequences of noncompliance, financial institutions would be well advised to promptly assess the adequacy of their BSA/AML procedures in light of the release and to augment or modify those procedures where appropriate. It is also reasonable to conclude that the issues presented in the Guidance will receive heightened scrutiny in regulatory inspection, examination and enforcement programs.
Footnotes
1. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Securities and Exchange Commission, in consultation with the Commodity Futures Trading Commission, also issued this Guidance.
2. A copy of the Guidance may be found at http://www.fincen.gov/statutes_regs/guidance/html/fin-2010-g001.html
3. The definition of a "beneficial owner" under FinCEN's regulations specific to due diligence programs for private banking accounts and for correspondent accounts for foreign financial institutions is the individual(s) who have a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual(s), directly or indirectly, to control, manage, or direct the account. The ability to fund the account or the entitlement to the funds of the account alone, however, without any corresponding authority to control, manage, or direct the account (such as in the case of a minor child beneficiary), does not cause the individual to be a beneficial owner. This definition may be useful for purposes of this Guidance. See, e.g., 31 C.F.R. 103.175(b).
4. The rules promulgated under Section 326 of the USA PATRIOT Act provide that, based on a financial institution's risk assessment of a new account opened by a customer that is not an individual, a financial institution may need to take additional steps to verify the identity of the customer by seeking information about individuals with ownership or control over the account, including signatories. See, e.g., 31 CFR 103.121(b)(2)(ii)(C)
5. Covered financial institution means: (1) For purposes of §§ 103.176 and 103.178: (i) An insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act); (ii) A commercial bank; (iii) An agency or branch of a foreign bank in the United States; (iv) A federally insured credit union; (v) A savings association; (vi) A corporation acting under section 25A of the Federal Reserve Act; (vii) A trust bank or trust company that is federally regulated and is subject to an anti-money laundering program requirement; (viii) A broker or dealer in securities registered, or required to be registered, with the Securities and Exchange Commission under the Securities Exchange Act of 1934, except persons who register pursuant to section 15(b)(11) of the Securities Exchange Act of 1934; (ix) A futures commission merchant or an introducing broker registered, or required to be registered, with the Commodity Futures Trading Commission under the Commodity Exchange Act, except persons who register pursuant to section 4(f )(a)(2) of the Commodity Exchange Act; and (x) A mutual fund, which means an investment company (as defined in section 3(a)(1) of the Investment Company Act'') that is an open-end company (as defined in section 5(a)(1) of the Investment Company Act (15 U.S.C. 80a–5(a)(1))) and that is registered, or is required to register, with the Securities and Exchange Commission pursuant to the Investment Company Act.; (2) For purposes of §§ 103.177 and 103.185: (i) An insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act); (ii) A commercial bank or trust company; (iii) A private banker; (iv) An agency or branch of a foreign bank in the United States; (v) A credit union; (vi) A savings association; (vii) A corporation acting under section 25A of the Federal Reserve Act; and(viii) A broker or dealer in securities registered, or required to be registered, with the Securities and Exchange Commission under the Securities Exchange Act of 1934, except persons who register pursuant to section 15(b)(11) of the Securities Exchange Act of 1934. 31 C.F.R. 103.175(f )(1).
6. A "private banking account" is defined as an account (or any combination of accounts) maintained at a covered financial institution that: (1) requires a minimum aggregate deposit of funds or other assets of not less than $1,000,000; (2) is established on behalf of or for the benefit of one or more non-U.S. persons who are direct or beneficial owners of the account; and (3) is assigned to, or is administered or managed by, in whole or in part, an officer, employee, or agent of a covered financial institution acting as a liaison between the covered financial institution and the direct or beneficial owner of the account. 31 C.F.R. 103.175(o).
7. 31 C.F.R. 103.178.
8. A senior foreign political figure is a current or former senior official in the executive, legislative, administrative, military, or judicial branches of a foreign government (whether elected or not), senior official of a major foreign political party or a senior executive of a foreign government-owned commercial enterprise, a corporation or other entity formed by or for the benefit of such individuals, or any immediate family member or widely and publically known close associate to such individuals. 31 C.F.R. 103.175(r).
9. The definition of covered financial institution discussed above applies to both the private banking and correspondent account regulations. 31 C.F.R. 103.175(f)(1).
10. Generally, a "correspondent account" is defined as an account established for a foreign financial institution to receive deposits from, or to make payments or other disbursements on behalf of, the foreign financial institution, or to handle other financial transactions related to such foreign financial institution. 31 C.F.R. 103.175(d)(1).
11. The term foreign financial institution means: (i) A foreign bank; (ii) Any branch or office located outside the United States of any covered financial institution; (iii) Any other person organized under foreign law (that, if it were located in the United States) would be a covered financial institution; and (iv) Any person organized under foreign law that is engaged in the business of, and is readily identifiable as: (A) A currency dealer or exchanger; Or (B) A money transmitter. 31 C.F.R. 103.175(h).
12. A foreign bank is a bank organized under foreign law, or an agency, branch or office located outside the United States of a bank. The term does not include an agent, agency, branch or office within the United States of a bank organized under foreign law. 31 C.F.R. 103.11(o).
13. A payable-through account is a correspondent account maintained by a covered financial institution for a foreign bank by means of which the foreign bank permits its customers to engage, either directly or through a subaccount, in banking activities usual in connection with the
14. Foreign shell bank means a foreign bank without a physical presence in any country. 31 C.F.R. 103.175(i).
15. 31 C.F.R. 103.177
16. In the Matter of Ferris, Baker, Watts Inc., Securities Exchange Act Release No. 59372, Investment Adviser's Act Release No. 2837 (February 10, 2009) available at http://www.sec.gov/litigation/admin/2009/34-59372.pdf. Failure to file an SAR or to maintain adequate AML procedures is a violation of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder.
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