The US Treasury Department is proposing a rule that would tighten regulations to prevent the use of shell companies in illicit activities. The Customer Due Diligence (C.D.D.) rule would require banks to identify persons who own 25% or more of shell companies before granting them bank accounts.
Although this provision had been in the works since 2012, the Panama Papers exposé showed the urgent need to plug loopholes in the current banking system.The US Treasury remarked that the C.D.D. would soon be passed on to the White House for review and approval.
Current regulations already require that banks should know their customers. However, no further specification is required for customers opening accounts for shell companies. The option of pushing through with additional investigation on the identities behind these corporate entities is left to the discretion of the banks.
Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network (FinCEN), said that the C.D.D. would leave no doubt on what is required from the financial institution. “…they must know and understand the beneficial ownership of their customers,” she added. “We already know that they need to know their customer, but where that customer is a legal entity, we are clarifying that they need to know and understand the beneficial owner of that customer. Who is actually calling the shots? Who stands to gain?”
Identification of beneficial owners is critical, as these shell companies often use dummy names of relatives, accountants, lawyers or other employees to hide true ownership. What is necessary is to figure out the real source of the funds. Aside from this, it is also possible that incorrect or fraudulent information would be used by those who open accounts. The new rule is not expected to require banks to verify the data submitted to them.
Rob Rowe of the American Bankers Association lamented that there may be no way to do the authentication. “That’s always been the problem. Banks can collect information but there is currently no mechanism to verify it or keep it updated, outside asking the company,” he said.
Shasky Calvery says that to help with the verification, the Treasury is supporting legislation that would lead to shell companies having to disclose its owners to the states where they are incorporated.
The spotlight has been focused on shell companies with the Panama Papers leak. The files hacked from Mossak Fonseca, a large wealth management firm from Panama, gained much attention due to the involvement of big names like resigned Icelandic Prime Minister Sigmundur Gunnlaugsson, family members of Pakistani Prime Minister Nawaz Sharif, the father of British Prime Minister David Cameron, and even links to Russian President Vladimir Putin.
The 11.5 million documents showed the use of off-shore companies to facilitate tax inversion and money laundering. Although not all included transactions are from dishonest activities, it revealed how shell companies can legally process money suspected to be sourced from fraud, international crime and terrorist financing.