AML Program Update:
FinCEN Restates Focus on Beneficial Ownership

The Financial Crimes Enforcement Network (FinCEN) is focusing on the risk that shell companies have on financial markets with veiling ownership. In both the keynote address and in the Anti-Money Laundering breakout sessions at the NASD Fall Securities Conference in Los Angeles, representatives of FinCEN made numerous recommendations for scrutinizing the beneficial ownership of accounts (and/or the companies that have accounts). These discussions, coupled with a FinCEN advisory issued November 9, 2006, confirm that broker/dealers need to look closely at CIP procedures in determining beneficial ownership. At a minimum, they need adequate information to know who the customer really is. Broker/dealers should have internal policies, procedures, controls, systems and training programs designed to prevent, detect, and report possible money laundering and other financial crime involving shell companies.

The FinCEN advisory was released along with an assessment showing that shell companies can be exploited by money launderers and other perpetrators of financial crime because of the lack of transparency in the formation process and the inability to identify beneficial owners. To exacerbate a complex matter, FinCEN clearly included limited liability companies (LLCs) in its definition of shell companies. While legal entities such as LLCs are legitimate corporate mechanisms, it is FinCEN's belief that states whose laws do not require LLCs to disclose or report identities of members or managers are attractive to people seeking to form a shell company for illicit purposes. This is significant because there are 47 jurisdictions in the U.S. in which ownership of an LLC may legally remain unreported, depending on how the LLC is structured.

The FinCEN advisory also expressed FinCEN's commitment to continue its outreach effort with the various states to discuss potential solutions to this issue. FinCEN will also continue to collect information and study how best to address the role of certain businesses specializing in the formation of business entities. All of these efforts will reduce money laundering and related vulnerabilities in the financial system through the promotion of greater transparency.