The Treasury Department lobbed a three-pronged attack against money laundering and tax evasion Friday by releasing a Customer Due Diligence final rule, sending Beneficial Ownership Information legislation to Congress, as well as issuing proposed regulations related to foreign-owned, single-member limited liability companies.
The measures are being hailed as Treasury’s reaction to the Panama Papers, which exposed that politicians, criminals and even celebrities are avoiding paying taxes by hiding their wealth in offshore shell companies.
Treasury Secretary Jacob Lew said that the measures “mark a significant step forward to increase transparency and to prevent abusive conduct within the financial system.”
Together, the efforts “target key points of access to the international financial system – when companies open accounts at financial institutions, when companies are formed or when company ownership is transferred, and when foreign-owned U.S. companies seek to evade their taxes,” according to Treasury.
The final CDD rule adds a new requirement that financial institutions – including banks, brokers or dealers in securities, mutual funds, futures commission merchants and introducing brokers in commodities – collect and verify the personal information of the real people (also known as beneficial owners) who own, control and profit from companies when those companies open accounts.
The rule also amends existing Bank Secrecy Act regulations to clarify and strengthen obligations of these entities.
The CDD rule also harmonizes BSA regulations and makes explicit several components of customer due diligence that have long been expected under existing regulations, as well as incorporating a new requirement for covered financial institutions to collect beneficial ownership information.
Treasury says that the rule contains three core requirements: identifying and verifying the identity of the beneficial owners of companies opening accounts; understanding the nature and purpose of customer relationships to develop customer risk profiles; and conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.
As part of the Beneficial Ownership Information legislation Treasury sent to Congress, companies formed within the United States would be required to file beneficial ownership information with Treasury, and face penalties for failure to comply.
“The misuse of companies to hide beneficial ownership is a significant weakness in the U.S. anti-money laundering/counter financing of terrorism regime that can only be resolved by Congressional action,” Treasury said.
The new draft legislation is an amended version of an Administration Budget proposal, reflecting discussions with Congress, law enforcement entities and others, according to Treasury.
The proposed legislation also contains technical amendments to the current Geographic Targeting Order (GTO) authority which would clarify FinCEN’s ability to collect information under GTOs, such as bank wire transfer information.
The proposed IRS rule issued Friday would require foreign-owned “disregarded entities,” including foreign-owned single-member limited liability companies, to obtain an employer identification number (EIN) with the IRS.
While the U.S.’ “federal tax system has very strong information reporting requirements for most types of entities formed in the United States,” the requirements under the proposal allow the IRS to determine whether there is any federal tax liability and if so, how much, and to share information with other tax authorities as appropriate, Treasury said.
Treasury, noted, however that the “narrow class of foreign-owned U.S. entities – typically single-member LLCs – that have no obligation to report information to the IRS or to get a tax identification number,” which are referred to as “disregarded entities” can be used to shield the foreign owners of non-U.S. assets or non-U.S. bank accounts.
Once finalized, the rules would allow the IRS to determine whether there is any tax liability, and if so, how much, and to share information with other tax authorities, Treasury states.
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