How New Bank Disclosure Rules Will Affect Your Business

Craig Owen White

The Obama administration adopted a rule this week and is proposing new federal laws that will impact what information corporations must disclose regarding its owners. US corporations are creatures of state governments, individually chartered under the laws of the state of its incorporation. Most states do not require corporations to publicly disclose the identity of their legal or beneficial owners. This anonymity of ownership has long been a hallmark of the US free enterprise system. The new regulation and proposed law threatens to bring this era to an end.

The administration has taken a two-step approach toward the federalization of US corporation law. The first step is this week’s implementation of modifications to the customer due diligence rules will prohibit banks, brokers, mutual funds and other financial institutions from doing business with any corporation, limited liability company or other entity unless, for each new account with such an entity, the financial institution has collected and verified information as to the identity of (i) any person or entity that owns, directly or beneficially, 25% or more of the entity and (ii) at least one (1) live person with significant responsibility to manage or control the entity, regardless of whether such person is an owner. The second step is encased in legislation the administration is submitting to Congress which would require all US corporations, regardless of the state of incorporation, to disclose the identity of their beneficial owners to the federal government.

Although the proposed legislation may not pass Congress and financial institutions have two years to fully comply with the new customer due diligence rules, companies should start preparing for the changes sooner rather than later. Since it is almost impossible for US business entities to do business without being customers of US financial institutions, the new know your customers rules will have a direct impact on how privately-owned US entities form and maintain their core entity as well as their subsidiary and affiliate entities. And, if the proposed legislation is adopted by Congress, the turn toward the federalization of corporation law will require a rethinking of how US business entities are structured.

For now, US corporations of all sizes would be well advised to start cleaning up their corporate minute books and stock ledgers as a new era of disclosure and transparency is upon us.