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Treasury Dept. Reports on Identifying Foreign InvestorsBy James Hamilton, J.D., LL.M., Senior Writer Analyst, CCH Federal Securities Law Reporter; Co-Author, CCH Federal Privacy Rules for Financial Institutions and.In a report to Congress ordered by the USA PATRIOT Act, the Treasury Department found that there are significant impediments to the ability of domestic financial institutions to identify, much less verify, the identity of foreign nationals seeking to open accounts. The wide disparity in identification documents, the pervasive problem of fraudulent identification documents, and the fact that many foreign nationals who establish domestic accounts are not physically present in the United States all combine to make it impracticable for Treasury to prescribe rigid rules for acceptable forms of identification. The impediments to the ability of financial institutions to consistently and accurately verify the identity of foreign nationals are complex and varied, the report concluded, and are compounded by the lack of a single, reliable system within the federal government that financial institutions can access to verify the identity of foreign nationals.IDENTIFICATION AND VERIFICATION The report, mandated by section 326 of the Act, was prepared in consultation with the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve Board. Section 326 of the Act addresses the identification and verification of all customers seeking to open accounts at financial institutions. It requires Treasury to establish minimum standards for the identification and verification of customers in connection with the opening of an account. In July, Treasury, after consultation with banking, securities and commodities regulators, proposed customer identification rules for banks, brokerage firms, mutual funds and futures commission merchants. The section 326 rules are designed to create minimum standards for customer identification applicable to all financial institutions opening accounts. Once final, the rules must be followed, meaning that financial institutions must take steps, consistent with their identification program, to form a reasonable belief as to the identity of their customers FOREIGN NATIONALS For purposes of verifying the identity of financial institution customers, the Act does not distinguish between U.S. citizens and foreign nationals. With respect to foreign nationals, however, section 326(b) required Treasury, in consultation with functional regulators such as the SEC and Fed, to conduct a study and issue a report containing recommendations on the most effective way to require foreign nationals to provide financial institutions with accurate identification information comparable to that required of U.S. nationals. When a financial institution is unable to form a reasonable belief as to the identity of a customer, appropriate action must be taken in accordance with the financial institution’s procedures, including refusing to open the account. The proposed rules set forth the requirement that financial institutions would have to establish a customer identification and verification program applicable to all new accounts that are opened, regardless of whether the customer is a U.S. citizen or a foreign national. Given the current absence of reliable or standardized identification for foreign nationals, the report urges financial institutions to make reasonable efforts to identify foreign nationals using existing information and documents pursuant to the firm’s customer identification procedures. To the extent a foreign national has a tax processing number or a Social Security number, Treasury encourages financial institutions to obtain that number as part of their account opening procedures as it may provide an audit trail for law enforcement. However, Treasury does not recommend imposing a requirement that all foreign nationals obtain such a number before opening an account at a U.S. financial institution. Rather, Treasury recommends that, in the absence of reliable and standardized identification for all foreign nationals, financial institutions should make reasonable efforts to verify identity using existing and available identifying information and documents, as directed by the pending customer identification rules Finally, the report recommends that financial institutions not be required to consult government databases to verify identity until such databases are complete and made available to them, preferably in one location. Presently, the government maintains no such comprehensive database. |