Identifying who the hidden owners of an entity may be is a key step in combatting money laundering and terrorist financing and complying with U.S. sanctionslaws. For banks in particular, this means identifying the ultimate beneficial owners (UBOs) of customers who are legal entities. Typically, banks will try to identify everyone holding some specified percentage of ownership of the entity. Unlike the situation in other countries, current US laws do not specify that threshold, leaving banks on their own to decide what percentage of ownership should trigger a closer look. The Financial Crimes Enforcement Network (FinCEN), the agency in the United States primarily responsible for administration of anti-money laundering and terrorist financing laws at the federal level, is seeking to change this.
Under a proposed rule released in August 2014, FinCEN would require that financial institutions (banks, securities brokers and dealers, mutual funds, futures merchants, and commodities brokers) identify all natural persons ultimately owning 25 percent or more of the equity interest of a legal entity. This 25 percent threshold for identifying UBOs is the same as that applied under the EU’s 3d Anti-Money Laundering Directive.
Another agency within the US Treasury Department, the Office of Foreign Assets Control (OFAC), has taken a different approach regarding the threshold for identifying UBOs. In the past, OFAC, which administers and enforces U.S. sanctions laws, stated any entity that was owned 50 percent or more by a single designated person was itself subject to the same sanctions as a matter of law. This meant that, as a practical matter, financial institutions were required only to identify UBOs who owned at least 50 percent of an entity. In recent guidance however, OFAC has stated that it will treat an entity as being subject to US sanctions if it is owned 50 percent or more in aggregate by designated persons. This approach appears to obligate financial institutions to identify all UBOs, regardless of their share of ownership, so that they can determine whether any such UBOs are designated persons, and if so, whether they collectively own 50 percent of the entity in question.
This conflict between approaches could place financial institutions in a situation in which, although they are complying fully with FinCEN regulations (and their own national laws as well, if they are not a U.S. company), their compliance efforts may be deemed inadequate by the OFAC. In this respect, the OFAC interpretation has the effect of superseding FinCEN’s proposed rule (as well as the UBO requirements of the EU’s Third AML Directive). The Treasury Department has the opportunity to address this conflict by modifying OFAC’s guidance or FinCEN’s final rule on UBOs, which is expected to be issued in 2015.