U.S. anti-money laundering (AML) policy is changing, and legal teams need to know how updated regulations impact the closing process for mergers and acquisitions (M&A).
Effective May 2018, the Financial Crimes Enforcement Network (FinCEN) bureau of the U.S. Department of the Treasury began enforcing updated know your customer (KYC) rules for all federally regulated financial institutions. The regulations require banks to identify and verify certain information from all legal-entity customers (e.g., corporations, LLCs, partnerships or other entities) who open accounts. Getting to “know” a customer in this way helps authorities prevent illegal activities, such as money laundering, terrorist financing, illegal drug activity, human trafficking and other crimes.
Collecting the required data — a process referred to as customer due diligence (CDD) — is mandatory, and failure to comply can result in regulatory fines, penalties and other consequences. To ensure all applicable requirements are being met, M&A teams should familiarize themselves with the applicable documentation. They should also establish a working relationship with an experienced escrow agent who can provide expertise and answer questions.
While this article isn’t a sufficient substitute for consulting a qualified escrow agent, it will provide a general overview of some of the updated AML and KYC changes.
M&A considerations
For AML purposes, regulations consider the buying side of an M&A escrow to be the bank’s customer and puts the onus on them to provide more KYC documentation than the selling side. Except in unusual cases where M&A buyers have KYC exemptions, they’re required to supply the following documents:
- Articles of formation and/or Certificate of Good Standing (or a similar formation document)
- W-9 (W-8 if not a domestic entity)
- Completed business questionnaire
- Completed certification of beneficial ownership
- A signed and dated certification from the person opening the account stating the information provided is accurate to the best of their knowledge. (The certification of beneficial ownership covers this requirement for most M&A transactions.)
Beneficial ownership
Banks are also required to identify and verify beneficial owners — that is, certain individuals who have ownership stakes or control in legal entity customers. This must include at least one individual who has significant control over the legal entity’s affairs.
A beneficial owner is defined as any individual who possesses ownership (ownership prong) and/or control (control prong) of the business customer.
- Ownership prong: A bank must identify each individual, if any, who directly or indirectly (through any contract, arrangement, understanding, relationship or other agreement) owns 25 percent or more of the equity interests of a legal entity customer.
- Control prong: A bank must identify a single individual with significant responsibility to control, manage or direct the legal entity customer. This could include an executive officer or senior manager (e.g., CEO, CFO, COO, managing member, general partner, president, vice president or treasurer).
For all beneficial owners, banks must collect the following information:
- Legal name
- Date of birth
- Current residential or business street address
- Social security number (or equivalent government-issued identification for non-U.S. persons)
- Ownership percentage
- Indication whether the individual is a politically exposed person (PEP), in which case, additional information will be needed
What this means for you
Collecting information to comply with all new AML and KYC policies helps financial organizations better understand their customers’ activity and recognize if and when it seems unusual. More importantly, the process can also be a springboard to building a strong relationship, growing business and providing the products and services customers need to meet their financial goals. With the support of a qualified escrow agent, these new requirements, instead of being an obstacle, can actually help create stronger connections and drive success for you and your clients.
Learn more about the escrow services offered at U.S. Bank or contact an expert.
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