Legal fiction has become passé. At least in the eyes of the Treasury Department. The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has targeted legal entities with ties to money laundering schemes by requiring legal entities opening new accounts at financial institutions to disclose and verify identification of the entity’s beneficial owner.  Beneficial owner, in this context, means an individual with at least 25% equity in the entity.  This comes in the wake of FinCEN’s announcement requiring title insurance companies to identify cash buyers of high end real estate through, in part, revealing who the beneficial owner of the shell company purchasing the real estate is.

Both announcements are part of the latest phase in FinCEN’s enforcement of money laundering under the Bank Secrecy Act and the US Patriot Act.  Both announcements will, moreover, have far reaching implications for real estate purchasers, corporations involved in complex financial transactions, and the institutions doing business with these individuals and/or entities.

But what does it all mean?  What is FinCEN?  What is required of financial institutions under the Bank Secrecy Act?  Should I care? The answer to that last question is a hard yes, particularly if you are a financial institution.

Here are the basics.

FinCEN’s stated goal is to safeguard the financial system from illicit use and money laundering.  Sounds reasonable, right?  To that end, it makes use of the Patriot Act (yeah, it does this too) and the Bank Secrecy Act, which requires banks to make certain types of anti-money laundering reports available to the law enforcement community.  The most common types of reports are called Currency Transaction Reports (CTR’s), the filing of which is required when a transaction or a series of transactions meets these three factors:

1. It is more than $10,000;
2. It is conducted by or on behalf of the same person; and
3. It is conducted on the same business day

But don’t think you can be sneaky here.  Multiple transactions at different branches totalling $10,000 also triggers a requirement for the financial institution  to make a report.  Think you can spread out the deposits or withdrawals over a series of days?  Think again. Doing so may trigger a Suspicious Activity Report (SAR), which are required to be filed for any suspicious conduct above $2000.  Like, for instance, multiple check deposits totalling just under $10,000.
Law enforcement makes robust use of these reports to pursue money laundering and other illicit activity.  If a law enforcement agency determines that a criminal enterprise is laundering money through shell companies, through check cashing institutions, or through a real estate transaction, they will look to “follow the money’ by utilizing CTRs and SARs for the various corporate entities and individuals.

Which brings us back to FinCEN’s beneficial ownership rule, which extends the due diligence to be undertaken by financial institutions to the individual behind a corporate entity.  Responsible persons (beneficial owners) must be both identified and verified by financial institutions.  The only caveat here?  Financial institutions may rely on the information given to them by the beneficial owner, assuming they have no reason to believe it false.

For law enforcement institutions, the expanded due diligence requirements will make life much easier.  Corporate transactions will be linked to specific individuals whose activity can be identified and investigated.  This gives law enforcement a parallel track on which to “follow the money.”  For financial institutions and other professionals (legal, accountants) who represent corporate entities, this makes life much harder.  Not only has FinCEN expanded its due diligence obligations, but by requiring these institutions to ascertain additional information, they are requiring the institution to expand its knowledge base.  Knowledge is power.  And when it comes to alleged illicit activity, power can be a headache.

Financial institutions and individuals who represent corporate entities in complex financial institutions should make sure they are familiar with the new FinCEN regulations and the existing reporting requirements to which it attaches.  Knowledge,  after all, is power.

Bergstein Flynn Knowlton & Pollina PLLC
At Bergstein Flynn Knowlton & Pollina PLLC, we pride ourselves on being a different kind of law firm. We are not just your attorneys, we are your partners.
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