US amends anti-money laundering law for beneficial ownership after Panama Papers, including to detect purchases of expensive real estate with illicit money

By Christine Duhaime | May 8th, 2016

Panama Papers Driven Changes

The US Treasury has announced several amendments, and proposed legislative amendments, to its anti-money laundering (“AML“) legislation in the wake of the Panama Papers scandal to tackle the disclosure of what is called “beneficial ownership.” Beneficial ownership means the beneficial, as opposed to the legal, owner of shares of a private company, foundation, trust or similar organization. A beneficial owner is one who actually owns or controls shares of a private company and who may or may not also be the legal owner. The legal owners of shares is the person who legally holds them.

The US announcement tackles three areas: (a) enhanced customer due diligence (“CDD“) requirements; (b) proposed beneficial ownership laws; and (c) new reporting obligations for expensive real estate purchases to detect money laundering.

1. Customer Due Diligence Laws

Under the CDD requirements, banks, brokers and securities dealers will have to collect and verify the personal information of the beneficial owners of private companies when they open bank or other accounts.  In parallel, the Bank Secrecy Act (“BSA“) regulations will be amended in respect of CDD for beneficial ownership at 25% or above, and for those shareholders who control the company irrespective obviously of the percentage of shareholdings.

With respect to the BSA aspect, financial institutions will be required to: (1) identify and verify the identity of the beneficial shareholders of private companies opening accounts; (2) understand the customer relationships and create risk profiles; and (3) monitor, on an ongoing basis, customer transactions for the purposes of reporting suspicious transactions.  The purpose of the CDD rule is to collect more information on international financial transactions for sharing with law enforcement and ties into the global FATCA regime that requires reporting to the IRA from most countries in the world by over 200,000 banks.

2. Beneficial Ownership Laws

The US will also be adopting new beneficial ownership legislation that is triggered at the time of incorporation of a private entity. The law would require that companies, as opposed to lawyers or corporate registries, retain records of their beneficial owners, file it with the US Treasury and make it available to law enforcement.

Interestingly, the proposed legislation authorizes the government to require every US entity to report beneficial ownership in respect of itself or others and therefore extends way beyond normal reporting entities captured under the BSA. The change is quite sweeping because a US entity is defined to include any company registered in the US and that uses the US postal service, wire services (essentially any Internet) or any facility (a venue, an office, a garage, a home) for interstate or foreign commerce for business.

As a result, every single business that is qualified, registered, organized or created in the US is going to be required to, as a matter of practice, become a reporting entity in the anti-money laundering legal sense for beneficial ownership purposes, including any foreign company.

There may be an exemption for foreign entities that are not created or registered in the US and conduct business there but that is doubtful because they may be caught by being “qualified” even though not registered in the US and also because it would otherwise not do much to capture information in respect of tracking the movement of proceeds of crime using beneficial ownership structures if it just applied to registered corporate entities operating in the US. The sole distinction here is between foreign entities doing business in the US that do so under registered companies in the US versus those that do business in the US without registering companies.

3. Reporting of Expensive Real Estate Purchases to Detect Money Laundering

The proposed law also contains  amendments to existing orders to clarify the authority of FinCEN to collect information on all cash purchases of mansions and high-value homes. The amendments are designed to allow the US government to  look at vulnerabilities in the real estate sector to detect money laundering.

The US is leading in the crack-down against proceeds of corruption being used for the purchase of mansions as a matter of financial crime by requiring real estate transactions of a high value in New York and Miami be reported to FinCEN.

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