In the wake of the “Panama Papers” scandal, Treasury Department officials pledged a renewed focus on issues related to shell companies and beneficial ownership. On Friday morning, making good on that promise, the agency announced actions intended “to strengthen financial transparency and combat the misuse of companies to engage in illicit activities.”

Among those steps: the announcement of a customer due diligence final rule; proposed beneficial ownership legislation; and proposed regulations related to foreign-owned, single-member limited liability companies. 

Treasury Secretary Jacob Lew highlighted these efforts in a letter to Congress, urging it to act on beneficial ownership legislation, providing full reciprocity with Foreign Account Tax Compliance Act partners, and approving bilateral tax treaties currently pending in the Senate.

The customer due diligence 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 (beneficial owners) who own, control, and profit from companies when those companies open accounts.  The rule also amends existing Bank Secrecy Act regulations to clarify and strengthen obligations of these entities. 

The rule harmonizes BSA regulations and makes several components of customer due diligence that have long been expected under existing regulations more explicit, as well as incorporating a new requirement for covered financial institutions to collect beneficial ownership information. 

Specifically, the rule contains three core requirements: identifying and verifying the identity of the beneficial owners of companies opening accounts; understanding the nature and purpose of customer relationships to develop customer risk profiles; and conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. 

Financial institutions will need 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 an August 2014 proposal, the final rule extends the 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.

Beneficial ownership legislation

The Treasury Department also announced it will send beneficial ownership legislation to Congress 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 by Lew in his letter to Congress, 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 proposed legislation also contains technical amendments to the Treasury Department’s current Geographic Targeting Order authority to clarify the Financial Crimes Enforcement Network’s ability to collect information under GTOs, such as bank wire transfer information. The most recent GTOs temporarily require 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 an indicator of individuals attempting to hide their assets. Also, in January, FinCEN issued GTOs focused on New York City and Miami-Dade County, Florida. The Treasury’s enforcement arm intends to evaluate the information it gains from these GTOs to “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 proposed regulations

Also announced were proposed regulations to require foreign-owned “disregarded entities,” including foreign-owned single-member limited liability companies (LLCs), to obtain an employer identification number with the IRS. This is intended to address 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, the IRS will be better able to determine whether there is any tax liability and share information with other tax authorities.

Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more