Banking non-secrecy: what information is collected by banks about companies

Incorporation of a company entails opening a bank account. Formerly, the relationship between banks and customers was based on trust and partnership relationship, while credit institutions were only responsible for internal assessment of risks. Nowadays everything operates differently: when opening a bank account, you are required to provide a considerable amount of information, some of which shall be made available to tax and other regulatory authorities. Let’s understand how it happened and what is to be done about it.

AML/CTF: main principles of anti-money laundering regulations

Before outlining what exactly banks may require for the purpose of opening and maintaining an account, let’s analyze how it is regulated and why it concerns almost all countries.

Anti-Money Laundering and Combating the Financing of Terrorism (AML/CTF) — such laws and regulations have been gradually enacted in most countries. For example, in 1989, the Financial Action Task Force (FATF) was established, bringing together more than 30 countries. It should be noted that the matters related to money laundering and financing of terrorism has expanded beyond internal governmental policy and has become global.

The main task of the FATF is to develop recommendations in the area of AML/CTF regulations. Despite the title “recommendations”, they are mandatory incorporated into international and local laws and regulations. Links to the FATF recommendations are even contained in the tax regulations — the Common Reporting Standard. Instructions are also issued for the financial sector — banks. The global approach has its advantages — the instructions which are binding for the banks in various countries on money laundering and financing of terrorism are similar.

How banks check their customers

Banks on the basis of FATF instructions allocate all customers to certain risk groups (risk-based approach). This approach is intended to help companies understand the “bottlenecks” in money laundering issues. Risks may arise in the jurisdictions where companies operate, with regard to customers, transaction channels, and, of course, the products and services provided by companies.

Therefore, when opening a company account, banks shall request information about current or planned activities, structure, intended operations, they will ask to complete relevant bank forms containing a large number of questions. It is really large. Separately, the bank will ask to disclose a beneficiary, and not only his residential address and employment history, but also, for example, information about the sources of his income and the amount of assets.

What other documents can be requested by a bank:

· documents evidencing the source and amount of income (for example, in the form of a tax return);

· letters of recommendation from other banks, audit or legal companies evidencing business reputation;

· documents evidencing ownership of real estate;

· other documents that a bank may deem necessary.

But FATF and its requirements which govern the activities of banks are not the only requirements available. Within the scope of the US Financial Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) it is also required to provide documents. Thereafter the forms shall be submitted to the tax authorities. The good news is that the information will be exchanged between countries which have signed the relevant agreements. The bad news is that there are practically no states left in the world which have not signed such agreements. A certain risk level shall also be assigned here.

Among other things, many banks require real and / or economic substance of the company (real substance). This is due to the fact that a state where the legal entity is located shall make sure that the company really exists and operates on its territory, and does not try to evade taxes in some other place. Such requirements vary depending on the jurisdiction, but they have common essence.

The company shall meet the following requirements:

· local director;

· qualified employees;

· local expenses;

· office rent;

· performance of actual operations.

Otherwise, the bank will pay excessive attention to a company or in some case may refuse to provide services.

What is a high risk level?

In short: a bank may refuse to provide services or closely monitor each movement of the company. In the case of the real substance requirement, the bank may become suspicious in respect of a company in case of insufficient office space, material assets and employees. It will be called shelf company.

The following companies can be classified as high risk level companies according to AML/CTF requirements:

· companies with complex structure of affiliated and related parties;

· companies registered in offshore jurisdictions;

· companies with beneficiaries as Politically Exposed Persons/PEPs;

· companies which interact with counterparties participating in transactions which involve significant amounts of cash;

· companies registered in one of the high risk countries or in a country known for high levels of corruption, organized crime or drug trafficking.

It is logical that higher risk profile entails higher control measures. Important: banks have the right and will (if necessary) monitor suspicious transactions, since they are required on continues basis to report to the regulator with regard to measures for compliance with AML / CTF regulations.

What is to be done?

Simple advice again: comply with requirements, structure your business competently and ensure compliance. It is difficult to determine a complete list of criteria under which companies can be referred to high risk companies: this list expands with every amendment to AML / CTF regulations.

For your information: opening a bank account and its further maintenance constitutes a burdensome procedure. The customer will have to disclose maximum information about itself and a company and perform it correctly.

How to open and maintain a bank account:

· employ lawyers who will provide advice and ensure compliance during the stage of company formation and adhere to their recommendations.

· follow the changes in laws and regulations not only in the place of incorporation of a company, but also in the countries where your counterparties are located.

· outsource this task to a professional company or service.

YouReg Platform helps to open a bank account and provides necessary services for incorporation of a company and its further administration. The Platform operates in partnership with international law firms specializing in tax matters.

First of all, companies which intend to operate in foreign markets, and those which plan to open accounts in foreign banks, need to remember and comply with AML/CTF and international tax requirements. These processes are associated with great inconveniences (if you perform them by your own resources), but on the other hand, they bring new opportunities.