Compliance Matters recently conducted a brief interview with Laura Glynn (pictured), the compliance expert at Fenergo, the client lifecycle management software vendor. Among other things, she made some observations about the different thresholds prevalent in different countries.

Laura Glynn drew attention to the fact that under the US Foreign Accounts Tax Compliance Act 2010, Foreign Financial Institutions (FFIs) are required to submit reports to the Internal Revenue Service either directly or through their local tax authorities (depending on the nature of the inter-governmental agreements or IGAs they have signed with the US). Model 1 IGAs require institutions to report all FATCA information to their local tax authority who, in turn, then report to the IRS and some of the Model 1 IGAs are reciprocal, meaning that the US will need to provide certain information about residents of the Model 1 country to the Model 1 country in exchange for the information that country provides to the U.S. Model 2 IGAs require institutions to report all FATCA information directly to the IRS and there are 14 of these either signed, ‘understood’ or in force. The interview, summarised in brief below, is in the style of a question-and-answer session.

Q: What are your observations about the effects of the Panama Papers on regulation?

A: In beneficial ownership there's been a lot of change – notably the US FinCEN final rule on CDD which was enacted in July 2016. It has a deadline of 11 May 2018. Up until now, the US has never had any federally nominated beneficial ownership rules. FiCEN is mandating 25% - in other words, each financial institutions is expected to find out the beneficial owner of 25% or more of any entity with which it wants to form a business relationship. It will apply to each and every new account.

Q: Not to old accounts?

A: No, not to old ones. They're not mandating look-backs. It's not for a new customer, it's for a new account. The language is vague. You have to update customer due diligence on an event-driven basis in the course of normal monitoring activity, but it's vague. There's no threshold. Every time it has to be the full CDD process with documents being presented; it doesn't matter if you did it for the same customer last week. The key to it is that it's a rule to find two types of beneficial owner – the one who owns 25% of an entity or the one who controls it. Regulated financial institutions and linked entities are exempted. Pooled investment vehicles are only partially exempted and you'll only have to do CDD on control, not on the 25% ownership. Trusts are an interesting one – they are exempt from the rule unless the trust is the beneficial owner of another entity. It's thought, though, that the regulator will regard it as 'best practice' for a financial firm to do CDD on the grantor/settlor. The final rule applies to all covered financial institutions, i.e. those already subject to Bank Secrecy Act Customer Identification Program (CIP) requirements, unless an exemption applies.

Q: What about elsewhere in the world?

A: The European Union's fourth money laundering directive has to be transposed into the national laws of EU countries. In the UK it's being transposed in the next set of Money-Laundering Regulations. HM Revenue & Customs will maintain a new register of taxable express trusts. The trustees have to provide updates to it. All over the world, because of the rules of the FATF, countries are planning to make financial institutions identify people who own 25% or more of various entities. In Hong Kong at the moment, they have a '25/10' risk rate – it's 25% for low-risk entities and 10% for high-risk ones - but now they're rolling back the risk rate to 25% for everybody. When the regulator asked for comments about this in its consultation paper, there was good support for the 25% figure. It's interesting to note that the EU is going the other way – in its proposals for a fifth AML directive, it is suggesting a 10% threshold for entities that pose a higher risk. Other countries go further – in the Philippines, you're required to find the beneficial owner even if he only has 2% of a highly risky entity!

* Laura Glynn can be reached at info@fenergo.com