On December 13, the state of Delaware passed regulations that will require any new business entities formed within the state to be screened against lists maintained by the Office of Foreign Assets Control (OFAC). The new regulations are set to take effect Jan. 1, 2019.
The regulations also mandate that Delaware registered agents check their lists of existing clients, associated contacts and entities against the OFAC lists on a quarterly basis, at minimum. Checks also must be performed whenever client information is transferred from another agent, and whenever an agent receives new contact information from a client.
These new requirements are part of heightened Know Your Customer (KYC) rules to help detect entities registering for illicit purposes—and follow a string of bad publicity for the state stemming from Limited Liability Companies (LLC) linked to drug kingpin Joaquín “El Chapo” Guzmán and Michael Cohen, an attorney for President Trump from 2006 until May 2018.
Exploring the El Chapo situation reveals a textbook example of the complications that can arise from OFAC’s 50 Percent Rule. The business entity that was related to El Chapo was not listed on OFAC’s SDN list. However, because of the level of ownership and control that El Chapo had in the business, it was still considered a sanctioned entity. In other words, anyone doing a basic screen against OFAC’s SDN list on the entity name alone would not have received a match, but due to the 50 Percent Rule, would still be subject to blocking requirements and penalties associated.
Because these new regulations stem, in part, from high-profile cases involving entities registered within Delaware, it is safe to conclude the following:
- Companies in the state will be held to much higher KYC standards for vetting, checking sources for information and risk rating their customers based on a variety of signals.
- The new rules are an example of a separate layer of risk due diligence that is starting to be the new expectation for all types of businesses.
- To comply with the new requirements, all registered agents within Delaware should seek tools that not only screen new entities, but also rescan their databases quarterly.
Delaware is the first state to pass regulations of this nature, and it is likely we will see other states follow suit in the coming years.
Familiarize Yourself with the 50 Percent Rule
Adhering to the 50 Percent Rule adds a significant, but necessary burden to your compliance program. For helpful information on staying compliant with the rule, I encourage you to watch this on-demand webinar on watch list screening we hosted with the Association of Insurance Compliance Professionals.
Amber Goodrich, compliance strategist for CSI Regulatory Compliance, has more than 10 years of financial industry experience. She is a Certified Regulatory Compliance Manager (CRCM) and Certified Bank Secrecy Act (BSA) Professional (CBAP).