Beneficial Ownership and AML, Sanctions and Anti-Corruption Compliance

Sometimes compliance realities outpace enforcement and regulatory requirements. When it comes to FinCEN’s proposal to implement a beneficial ownership rule for financial institutions (see Here), global financial institutions do not need to worry about the outcome of the FinCEN regulations. Global financial institutions already have to know their (your) customer because of compliance obligations with sanctions and anti-corruption laws.

In the anti-corruption context, a financial institution may process transactions for a business customer, the ownership of which could include foreign government officials. Even if the foreign official has a small beneficial ownership, less than the 25 percent threshold as proposed by FinCEN, the account and the transactions may involve proceeds of corrupt conduct or other criminal activity.

In the face of this risk, global financial institutions need to identify all of the beneficial owners of the customer company. This is easier said than done when dealing with Chinese and Russian companies that are notoriously reluctant to disclose the true beneficial owners of a particular company, or have a complex, multi-layered ownership structure intended to “bury” the beneficial owner.

Corrupt foreign officials have tried to mask their ownership in bank accounts, business entities and numerous other assets. The Justice Department’s Kleptocracy Initiative is seeking to unmask and recover proceeds of bribery from corrupt foreign officials. It is a very difficult task and requires unique coordination among law enforcement agencies around the globe.

Aside from financial transactions involving corruption proceeds, recent enforcement actions surrounding sanctions violations have underscored the importance of knowing the identity of the business/customer with whom it is dealing.

Last year, the Office of Foreign Asset Control revised its 50 percent rule for applying sanctions prohibitions against entities in which a Specially Designated National (SDN) has an ownership interest. The old policy prohibited transactions with entities in which a single SDN owned 50 percent or more. Under the new policy, transactions are prohibited with an entity in which a combination of SDNs owns 50 percent or more.

As a consequence, companies have to know the beneficial owners of a company to ensure that a combination of SDNs does not own 50 percent or more of the entity. The due diligence process has to drill down to the beneficial owners of a business/customer through the maze of multi-layered companies and affiliations, identify the beneficial owners and then check them against all sanction databases.

These legal requirements, while burdensome, are a good business practice. It is always important for a company to know with whom it is dealing. There are too many risks in today’s compliance environment for companies to ignore the risks of disguised business owners.

Banks and financial institutions are familiar with these requirements and are well versed in how to look behind businesses and identify the owners. Customer identification and due diligence procedures are entrenched. However, FinCEN is about to impose even greater requirements for verifying beneficial ownership.

FinCEN’s proposal requires banks to dig down to owners who have 25 percent or more in an entity. While there is controversy surrounding the FinCEN proposal, banks and financial institutions need to focus on compliance realties and the obvious benefits of knowing with whom they are dealing.

Banks and financial institutions have had to expand their focus to include trade/sanctions and anti-corruption compliance. Knowing your customer has even more impact given the risks of hiring relatives of government officials, interactions with sovereign wealth funds, facilitating movement of illegal funds, correspondent banking relationships, and other global financial relationships and activities.