The Patriot Act and its Impact on Foreign Investments in the United States
Rym Khalifeh, King & Spalding LLP
In response to the terrorist attacks of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, commonly known as the Patriot Act, was enacted into law on October 26, 2001. Title III of the Patriot Act, aimed in part at combating the financing of terrorism, imposes certain obligations on financial institutions which, in turn, tend to have an impact on foreign investors making investments in the United States. This article provides an overview of certain provisions of the Patriot Act that are relevant to foreign investors making investments in the United States and describes certain practical approaches that US financial institutions have generally accepted to satisfy the Patriot Act's requirements.
Overview of the Patriot Act
In general, the Patriot Act imposes greater diligence requirements on financial institutions in their dealing with foreign investors. Financial institutions must observe minimum due diligence standards, including procedures for customer identification for accounts they open and maintain for their customers. Customer identification procedures must, at a minimum, include (a) a verification of the identity of any person opening an account by obtaining the customer’s name, address, date of birth and taxpayer identification number (or, for non-US persons, a similar number from a government-issued document) and examining such person’s driver’s license, passport or any other document deemed appropriate by the financial institution, (b) recordkeeping of the information used to verify the person’s identity and (c) a determination of whether the person appears on any list of known or suspected terrorists or terrorist organizations (such lists include the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control and the persons identified in Executive Order No. 13224 of September 23, 2001, Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit or Support Terrorism). In addition, financial institutions must adopt special measures for certain accounts, transactions or foreign jurisdictions identified by the US Treasury Department to be of primary anti-money laundering concern.
Impact of the Patriot Act on Foreign Investors
Foreign investors typically make their investments in the United States through entities formed in tax-favorable jurisdictions, such as the Cayman Islands and the British Virgin Islands, and/or entities formed in the United States. These ownership arrangements will result in the application of the Patriot Act in several ways. First, and most directly, the entity through which the foreign investments are being made in the United States will often need to establish a bank account at a US bank or will need to obtain financing from a US bank. The US bank in these circumstances will certainly require the information described in Part I above for that entity. In addition, the US bank will likely require information about the direct and beneficial ownership of that entity.
The scope of the information that a US bank will request about the foreign beneficial owners of an entity through which foreign investments are being made in the United States will depend on the nature of that entity’s foreign ownership. For example, if a single foreign investor is making an investment in the United States directly through a Cayman company and a US company, the US bank is likely to ask the foreign investor to provide the type of information described in Part I above. On the other hand, if a foreign financial institution or similar company is forming a fund consisting of a number of foreign investors, and that fund is making its investment in the United States through a Cayman company and/or a US company, US banks have generally accepted, as a means of satisfying their diligence requirements under the Patriot Act, a certificate from the foreign financial institution confirming that it has conducted appropriate diligence on the foreign investors in the fund and their source of funds, and that none of them is on any prohibited persons lists maintained by the Office of Foreign Assets Control. This foreign financial institution will often also need to confirm that it will monitor transfers of interests held by the foreign investors in the fund and regularly check the names of such foreign investors against updates to the prohibited persons lists maintained by the Office of Foreign Assets Control.
If the foreign investor is entering into a joint venture with a US company, the US joint venture partner may require similar information from the foreign investor even though the US joint venture partner may not technically be subject to the Patriot Act. As with a US bank, the US joint venture partner will seek to receive full information about the foreign investor if it is dealing with a single foreign investor. However, if the foreign investor is a fund comprised of a number of foreign investors, US joint venture partners have often accepted receiving a certificate of the same type that would be given to US banks.
Conclusiont
As a result of the greater diligence requirements that the Patriot Act imposes on US financial institutions, foreign investors may have to disclose detailed information concerning their identity and sources of funds in their dealings with US financial institutions. However, practices that facilitate compliance with the Patriot Act (such as the delivery by the foreign investors of certifications rather than detailed investor information) have been developed and are generally acceptable to US banks and joint venture partners.
Rym Khalifeh is an associate in the New York office of King & Spalding LLP. Ms. Khalifeh represents corporate clients and financial institutions in a variety of domestic and international corporate and financing transactions, including real estate financings, acquisition financings, Islamic financings and fund formations. King & Spalding LLP is an international law firm with more than 800 attorneys and offices in Atlanta, Houston, London, New York, and Washington, D.C.
