Anonymous shell companies are one of the most widely used methods for money laundering and hiding the proceeds of corruption around the globe. By now, most financial institutions understand that they must identify, verify, and collect beneficial ownership information on accounts opened by legal entities to deter illicit funds from flowing through the U.S. financial system. Therefore, there must be at least one true “person” with ownership responsibility documented for each business account to pierce the corporate veil. The importance of FinCEN’s Customer Due Diligence (CDD) Rule, effective May of 2018, is evident, and regulator expectations are high. The most common exam findings for BSA in 2019 included customer due diligence and enhanced due diligence violations, and insufficient or lack of thorough information on customers, including beneficial owners. Many refer to the CDD rule as the fifth pillar of BSA, which makes any exam finding more serious. Let’s take a brief step back to review the CDD Rule.
The CDD Rule amended the Bank Secrecy Act regulations to strengthen customer due diligence requirements for financial institutions. Although CDD regulatory expectations are not new, the CDD Rule codified existing expectations and the FFIEC Exam Manual enhanced its CDD section to clarify these expectations and add beneficial ownership requirements.
Why was FinCEN compelled to clarify and enhance their current CDD expectations? The global AML community has long seen the United States as behind in knowing their true customers (think Delaware incorporations). Shell companies, particularly in tax haven countries, can be used for legitimate business purposes, but they are also known to be vehicles for money laundering. The United States was criticized when the Panama Papers and the Paradise Papers were leaked in 2016 and 2017, respectively. In fact, the U.S. was at risk of becoming a grey listed country by the Financial Action Task Force (FATF) based on its lack of transparency in CDD regulations and allowing shell companies to be created and go undetected. Can you imagine what would happen to the U.S. economy if the U.S. became a sanctioned country for having insufficient AML and terror financing protections?