By Karen Lynch
Governments have recently increased efforts to eradicate illicit shell corporations by driving transparency down to the level of shareholders and other individuals who have effective control of companies involved in international commercial payments and flows. While the US government or the European Commission may not come knocking on your company’s door to ask for this “beneficial ownership” information, it has directed banks to begin collecting it from business account holders.
Specifically, in May 2016, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued rules strengthening customer due diligence requirements. To date, US banks and other financial services companies have not been required to know the identity of individuals with significant equity ownership or management control of companies holding business accounts. “This enables criminals, kleptocrats and others looking to hide ill-gotten proceeds to access the financial system anonymously,” according to FinCEN.1 Now, banks have until May 2018 to begin collecting this beneficial ownership information for new business accounts.
Similarly, a European Commission proposal of July 2016 seeks to establish public registries of such information.2 And from one country to the next, the specific information to be collected varies. For example, the US rules will only apply when a new business bank account is opened, whereas existing accounts would also be subject to Europe’s proposed rules.
Many banks already collect some beneficial ownership information on their own initiative, but inconsistently.3 With the requirements changing and being overseen more rigorously by regulators, companies outside of the financial services industry need to be aware of what will be expected of them and their contractors when conducting bank business to make international commercial payments. A first principle of avoiding regulatory risk is knowing how the landscape is shifting and taking proactive measures to avoid missteps and potentially costly bureaucratic delays.
Consider, as well, that in the US information gathered about a customer is to be used by banks to develop a baseline profile. Subsequent international commercial payments activity inconsistent with a customer’s baseline could trigger a “suspicious activity report” from a bank’s automated monitoring system. Suspicious activity reports are filed with US government authorities, unless evaluated and cleared by the bank. FinCEN cites, as suspicious examples, “executing cross-border wire transfers for no apparent reason or a significant change in the volume of activity without explanation.”
As technical as beneficial ownership may sound, it has captured enough of the world’s attention to be included in the communique from the Group of 20 (G20) Summit in September 2016 in Hangzhou, China. There, world leaders declared that: “Financial transparency and effective implementation of the standards on transparency by all, in particular with regard to the beneficial ownership of legal persons and legal arrangements, is vital to protecting the integrity of the international financial system.”4
Some of the drive for greater transparency when paying foreign contractors has come from recently leaked revelations of questionable offshore banking practices in the so-called Panama Papers. In an official statement responding to the May 2016 leaks, Angel Gurría, Secretary-General of the Organisation for Economic Co-operation and Development, said: “The OECD has been leading a global crackdown on these practices since 2009, working hand-in-hand with the G20. Establishing global standards and making commitments are just the start. Effective implementation is the key to lifting the veil of secrecy once and for all.”5
In the US, the overarching policy is a legislative framework known as the Bank Secrecy Act, under which authorities have required banks to keep various records and reports over the years for anti-money laundering purposes. These requirements are now being strengthened under the new regulations, and (with various exceptions) individuals owning 25 percent or more of a business account holder must be disclosed to banks – as must senior managers or executive officers, if wielding control over a company. The Treasury Department has also drafted pending legislation that would require companies to report beneficial ownership information to the government at the time of corporate formation, while also clarifying FinCEN’s ability to collect bank wire transfer information and other data about international payments.6
A more basic type of beneficial ownership information is also required by the US Internal Revenue Service (IRS), when American companies are paying foreign contractors. Companies are used to keeping W-8BEN or W-8BEN-E forms7 on file when the international commercial payments are for services performed overseas, mainly to confirm that the work is not performed in the US. But the information on the form is not at the level of detail sought by FinCEN.
Generally, no IRS reporting of the compensation or tax withholding is required in these circumstances. However, companies need to be careful if any portion of the services is performed in the US or by a US citizen abroad. In such cases, the IRS’ “US Withholding Agent Frequently Asked Questions” should be consulted, as should any relevant tax treaties, because withholding could be required.8
The location of the services should be noted in any agreement, according to Thomson Reuters, which suggests withholding in the event of any uncertainty, since liability for the tax, penalties and interest would otherwise fall on the company contracting the services.9
The US government and its counterparts around the world are tightening requirements on banks to better understand the identities of their business account holders – down to the level of significant shareholders and even including some senior managers. Companies paying foreign contractors need to familiarize themselves and their business partners with these new beneficial ownership rules and be prepared as their banks come into compliance with them.
Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.
1. “Customer Due Diligence Requirements for Financial Institutions,” Federal Register; https://www.federalregister.gov/documents/2016/05/11/2016-10567/customer-due-diligence-requirements-for-financial-institutions
2. “Commission strengthens transparency rules to tackle terrorism financing, tax avoidance and money laundering,” European Commission Press Release; http://europa.eu/rapid/press-release_IP-16-2380_en.htm
3. “INDUSTRY ADVISORY: FinCEN Issues Final Rules on Customer Due Diligence Requirements for Financial Institutions,” Treliant Risk Advisors; http://treliant.com/News-and-Events/Announcements-and-Releases/Announcements-Details/ArticleID/27017/INDUSTRY-ADVISORY-FinCEN-Issues-Final-Rules-on-Customer-Due-Diligence-Requirements-for-Financial-Institutions
4. “G20 Leaders' Communique Hangzhou Summit,” G20.org; http://www.g20.org/English/Documents/Current/201609/t20160906_3395.html
5. “OECD reaction to the ‘Panama Papers,’” OECD; http://oecdinsights.org/2016/04/05/oecd-reaction-to-the-panama-papers/
6. “Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion,” US Department of the Treasury; https://www.treasury.gov/press-center/press-releases/Pages/jl0451.aspx
7. Form W-8BEN-E, US Internal Revenue Service; https://www.irs.gov/pub/irs-pdf/fw8bene.pdf
8. “US Withholding Agent Frequently Asked Questions,” US Internal Revenue Service; https://www.irs.gov/businesses/international-businesses/u-s-withholding-agent-frequently-asked-question
9. NRA Withholding and Reporting on Payments to Foreign Nationals, Thomson Reuters;1. https://tax.thomsonreuters.com/wp-content/pdf/nra-tax/NRA_Withholding_Reporting_WP.pdf