This is part 2 of a five-part series with Tom Fox and the FCPA Compliance Report on the National Defense Authorization Act (NDAA) and changes to the Bank Secrecy Act (BSA) and the Anti-Money Laundering Act (AMLA). To listen to the first episode in the series, please follow this link.
One of the more significant components of the NDAA’s anti-money laundering (AML) reforms are around company formation reform. The issue of company formation reform begins with recognition that bad actors want to leverage the financial system, and they want to do so under false pretenses. Often, these bad actors dress up in the form of a legal entity whose ownership is not understood, and from there they are granted access to financial services markets and relationships that they otherwise would not have access to. This is an anonymizing technique for illicit actors of all stripes. It impacts all different types of compliance—anti-corruption, AML, and trade sanctions—as well as national security issues such as the financial of terrorism and proliferation of weapons of mass destruction.
The key reform in the area of company formation is identifying the ultimate beneficial owner (UBO). The beneficial ownership of a company—defined as any individual exercising substantial control over the entity or owning or controlling at least 25 percent of the company’s ownership interests—is different than the legal ownership or the nominal ownership of a company. With some notable exceptions, the NDAA requires companies formed in or authorized to do business in the United States to disclose their beneficial owner or owners to the U.S. Financial Crimes Enforcement Network, which will maintain a centralized database of UBO information. This measure is an effort to ensure that a company formed or operating in the United States cannot mask the ownership interests behind the company.
Financial institutions in the United States already had the obligation to know who owns any company with which they are doing business under the Customer Due Diligence or “CDD” Rule. This has meant that for example, if a bank onboards a U.S. company, the bank was already required to ask that company about UBOs and to obtain beneficial ownership information from that company. Based on global standards that have been promulgated and been a part of the global financial system for several years, banks all over the world have generally been required and expected to understand and obtain beneficial ownership information from their customers through the CDD process.
This introduces a question about the consistency of the relationship between financial institutions that have this obligation and jurisdictional authorities where these companies are created. Ideally, these standards should be as similar as possible, but they won’t necessarily be identical because the interests of the two are a little bit different. This where it will be interesting to watch the rulemaking that Department of Treasury will be pushing to implement this requirement—the NDAA directs the Department of the Treasury to revise the CDD Rule to reflect the introduction of the FinCEN UBO database. The revised rule is also likely to determine when financial institutions are permitted or expected to replace or verify their customers’ certifications with the information in the database.
By making the standards substantially similar, entities will be able to more cohesively understand that the beneficial owners of a company as reported to a financial institution are the same beneficial owners that would be required to report to the authorities under the NDAA.
