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WBK Industry News - Federal Regulatory Developments

Treasury Department Announces New and Proposed Rules Regarding Customer Due Diligence Requirements for Certain Financial Institutions

On May 5, 2016, the U.S. Department of the Treasury announced a Customer Due Diligence Final Rule (“Final Rule”) that enhances the customer due diligence obligations of various parties including:  banks, brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities. The Final Rule will become effective sixty days after publication in the Federal Register which occurred on May 11, 2016. The new rules, however, provide for a two-year compliance period, meaning that affected financial institutions will have until May 11, 2018 to come into full compliance.

The Final Rule adds a new requirement that financial institutions collect and verify the personal information of the real people, i.e. “beneficial owners”, who own, control, and profit from companies when those companies open accounts.  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. The purpose of the Final Rule is to 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.

In addition to the Final Rule, the Treasury also sent draft beneficial ownership legislation (“Draft Legislation”) to Congress and announced proposed regulations which would require foreign-owned “disregarded entities” to obtain an employer identification number (“EIN”) with the IRS (“Proposed Regulations”).

The Draft Legislation 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. Companies which fail to comply would face penalties under the legislation. The Draft Legislation also contains technical amendments to the current Geographic Targeting Order (“GTO”) authority which would clarify the Financial Crime Enforcement Network’s (“FinCEN”) ability to collect information under GTOs, such as bank wire transfer information.

The Proposed Regulations would require entities which currently have no obligation to report to the IRS or obtain a tax identification number, i.e. “disregarded entities”, to obtain an EIN with the IRS so that it may determine whether there is any tax liability. The goal of the Proposed Regulations is to strengthen the IRS’s ability to prevent the use of these entities for tax avoidance purposes.

The Final Rule is available here: https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-10567.pdf.

The Draft Legislation is available here: https://www.treasury.gov/press-center/press-releases/Documents/20160506%20BO%20Legislation.pdf.

The Proposed Regulations are available here: https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-10852.pdf.