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In response to the September 11, 2001 terrorist attacks, Congress passed the USA Patriot Act, which significantly enhanced existing anti-money laundering (AML) laws. As part of the USA Patriot Act requirements, financial institutions are required to have comprehensive due diligence policies and procedures in place for all of its customers so that it can "know its customer" and assess risks for money laundering and terrorist financing through use of its customer accounts.
Despite the important and legitimate roles corporate vehicles such as corporations, trusts, foundations and partnerships with limited liability play in the economy, they may, under certain conditions, be used for illicit purposes. Studies have shown that corporate vehicles are misused by criminals to disguise and convert the proceeds of their illegal activities. They are relatively easy to create and dissolve, and can lend themselves to concealing the sources of funds and true ownership, making them vulnerable for such illicit uses.
On March 5, 2010, the Financial Crimes Enforcement Network (a bureau of the US Treasury and the administrator of the Bank Secrecy Act) (FinCEN) and the Bank Supervisory Agencies (OCC, FDIC, FRB, OTS), as well as the NCUA and the SEC, published guidance (“Guidance”) to clarify existing regulatory expectations for obtaining beneficial ownership information for certain accounts.
The Guidance notes that the cornerstone of a strong AML compliance program requires comprehensive due diligence policies, procedures and processes for all financial institution customers. All financial institutions must assess its exposure to risk and develop an AML program tailored to their particular risk profile. A financial institution’s risk assessment should be a composite of many factors that take into account such things as the types of products and services it offers, the customers it serves, and its geographic location (for example, Hillsborough County, New Hampshire, has been designated by the Office of National Drug Control Policy, as a High Intensity Drug Trafficking Area).
Although any type of account is potentially vulnerable to money laundering or terrorist financing, certain customers and entities may pose specific money laundering risks. FinCEN's AML examination manual notes that certain products and services offered by a financial institution may facilitate a higher degree of anonymity, such as private banking and trust and asset management services.
The concept of customer due diligence begins with (i) verifying the customer's identity and (ii) assessing the risks associated with that customer. Customers with higher risk profiles should result in enhanced due diligence. Part of due diligence includes identifying and verifying beneficial owners1, based on the evaluation of risk associated with the account.
The Guidance provides examples of customer due diligence for when a customer is a legal entity such as a trust; it includes gathering information about the trust structure, determination of the provider of funds and any persons or entities having control over the funds or the power to remove the trustee.
The Guidance also addressed due diligence for private banking accounts2 at depository institutions. As part of due diligence programs, depository institutions that offer private banking services must take reasonable steps to ascertain the source(s) of the customer's wealth and anticipated activity of the account. Reasonable steps must be taken to identify nominal and beneficial owners of private banking accounts. With regard to private banking accounts, a covered financial institution's failure to take reasonable steps to identify the nominal and beneficial owners of an account generally would be viewed as a violation of the requirements of the Bank Secrecy Act, as implemented at 31 CFR 103.178.
New Hampshire law at RSA 564-B:10-1013 allows for, in lieu of providing a copy of the trust instrument, the furnishing of a certification of trust that does not contain information regarding beneficial ownership. The law further provides that a person making a demand for the trust instrument in addition to a certification of trust or excerpts is liable for damages if the court determines that the person did not act in good faith in demanding the trust instrument.
Because violations of the AML laws can carry significant criminal and civil penalties for financial institutions, financial institutions are particularly concerned about deterring and preventing illicit activities at or through their banks. Accordingly, many banks, depending on their risk profile, will want a copy of the full trust instrument in order to make these determinations, and trust attorneys should familiarize themselves with AML laws in order to better understand why this information is requested as part of the account opening process.
However, financial institutions are expected to exercise judgment and neither define nor treat all members of a specific category of customer as posing the same level of risk.
* Susan B. Hollinger is admitted in New Hampshire, Vermont and Massachusetts.
1. "Beneficial owner" is defined under FinCEN regulations (specific to private banking accounts) as the individual(s) who have a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual(s), directly or indirectly to control, manage or direct the account. The ability to fund the account or the entitlement to the funds of the account alone, however, without any corresponding authority to control, manage or direct the account (such as in the case of a minor child beneficiary), does not cause the individual to be a beneficial owner. See, 31 CFR 103.175(b).
2. "Private banking accounts is defined at 31 CFR 103.175(o) as an account that (i) requires a minimum aggregate deposit of funds or other assets of not less than $1,000,000; (2) is established on behalf of or for the benefit of one or more non-U.S. persons who are direct or beneficial owners of the account; and (3) is assigned to, or is administered or managed by, in whole or in part, an officer, employee or agent of a covered financial institution acting as a liaison between the financial institution and the direct or beneficial owner of the account. Private banking accounts that do not fit within this definition should be subject to the general CDD procedures, including, as appropriate, CDD procedures discussed above.
You may contact
Susan Hollinger at 603-545-3615.