The Securities and Exchange Commission (SEC) and US Treasury told financial firms at a July 'Compliance Outreach Program' conference to prepare for more stringent examinations on anti-money laundering efforts by 2016.
Failures to undertake proper due diligence during AML and other checks - particularly in regions where company information is difficult to obtain - represent a serious mis-perception of risk, they warned.
The US Treasury’s Financial Crimes Enforcement Network (FinCEN) told delegates the minimum customer AML due diligence obligation for banks, broker-dealers, and other financial firms would encompass the identification and verification of customers and the beneficial owners of legal entity customers.
Meanwhile, understanding the nature and purpose of customer relationships while conducting ongoing monitoring to maintain and update customer information and report suspicious transactions would become a pre-requisite, they added.
Additional FinCEN rules to formalise customer due diligence requirements under the Bank Secrecy Act (BSA) - which experts say will mean big adjustments for firms - are expected to be completed by early 2016.
These will apply to both large banks and smaller institutions such as broker-dealers, futures commission merchants, mutual funds and introducing brokers in commodities transactions.
The new rules will require firms to know and verify the identity of the 'ultimate beneficial owners' of their customers, identify individuals who own 25 per cent or more of the entity, verify the identity of customers and develop customer risk profiles with ongoing monitoring to maintain customer information and identify suspicious activity.
Penalties can be high for companies that neglect their compliance duties… In March this year, FinCEN fined Trump Taj Mahal Casino Resort a record $10m for violations of the BSA.
Demand for enhanced due diligence services is likely to increase markedly as chief compliance officers work to meet the growing demands of regulators, particularly in emerging markets, where efforts to perform background checks are often hampered by a lack of access to court records, corporate data and media reports.
A recent report by the British software provider Arachnys showed the highest number of due diligence searches it conducted last year were in two such challenging countries: China, and Russia (with around half as many enquiries), with demand high due to high levels of corruption and sanction violations, respectively…
In third place was the US, thanks to barriers that remain on obtaining corporate information at a state rather than federal level, and the ongoing difficulties associated with identifying a firm's beneficial ownership there.
Foreign regulators, as well as the International Monetary Fund, have long accused the US of being a global laggard on beneficial ownership assessments.
Edward Sornio, Managing Director of Worldbox, says conducting enhanced due diligence in the US often means making site visits to ensure accuracy when verifying whether a company exists or not.
"We've seen an increase in site visits being conducted in the US due to these well-known barriers to obtaining corporate information, as well as in many other countries where business information is hard to obtain. Certainly, the old adage of a picture being worth a thousand words rings true when conducting company research in States and further afield," he explains.
"What's more, fluctuating market conditions mean only the most up-to-date company information will do, when compiling business intelligence for clients to make key decisions from, during the due diligence process".