On July 30, 2014, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) proposed rules requiring U.S. financial institutions to collect “Customer Due Diligence” information. The purpose of these proposed rules is to prevent unscrupulous individuals from using anonymous companies to engage in or launder the proceeds of illegal activity in the U.S. financial sector. These rules are expected to strengthen customer due diligence obligations of banks and other financial institutions.

The proposed rules target non-US persons who have fallen out of compliance with their tax obligations in their native countries and who are using their U.S. financial accounts to shelter income from their home governments.

Under the proposed rules, customer due diligence includes four core elements:

(1) Identifying and verifying the identity of customers;

(2) Identifying and verifying the beneficial owners of legal entity customers;

(3) Understanding the nature and purpose of customer relationships; and

(4) Conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

These proposed amendments represent significant enhancements to the Bank Secrecy Act and build upon post-9/11 regulations designed to insulate the U.S. financial system. They would make valuable information needed to disrupt illicit finance networks available to law enforcement. The resulting increase in financial transparency would enhance the ability of financial institutions and law enforcement to identify the assets and accounts of criminals and national security threats.

Another goal of these rules is to further the U.S. government’s obligations to those countries with which it has a “reciprocal” Intergovernmental Agreement (IGA) under the Foreign Account Tax Compliance Act (FATCA). What is a “reciprocal” IGA? A slight digression is necessary to provide some background information on “reciprocal” IGAs.

A reciprocal IGA is a Model 1 IGA. Under a Model 1 IGA, the United States agrees to provide a foreign government with information that U.S. financial institutions currently report for accounts held by residents of the partner jurisdiction. This includes information collected under the bank deposit interest regulations.

The rub that many countries have is that current U.S. Treasury regulations do not require U.S. financial institutions to report the same information about their non-U.S. clients to foreign governments as foreign financial institutions are required to report about their U.S. clients to the U.S. government under FATCA. For example, FATCA requires foreign financial institutions to report the account balance or value of all financial accounts, including bank deposits and custodial accounts. Current Treasury regulations, on the other hand, merely require U.S. financial institutions to collect information on the U.S.-source income paid to those accounts. Thus, the argument is that there is a double-standard and that Uncle Sam is being a hypocrite.

The proposed FinCEN rules attempt to level the playing field by requiring the U.S. to provide partner countries with the same type of information that the U.S. currently receives from foreign financial institutions about their U.S. customers. Thus, the reciprocal IGA incorporates a policy commitment by the U.S. to implement rules and support legislation that would provide for equivalent levels of information exchange. This answers the age-old question, what motivation does the foreign government have to cooperate in the first place? In other words, what does it get out of this?

A full list of countries having IGAs and the type of IGA can be accessed here.

Treasury’s FinCEN writes the rules and regulations that U.S. financial institutions, such as banks, credit unions, and money services businesses, must follow to help protect the U.S. financial system from money laundering and terrorist financing. FinCEN also has the civil power to enforce these rules and penalize offenders.