Chapter 14 Customer-Identity Regulations and Their Effects on Banking Transactions in Bankruptcy

• Jurisdiction: United States

Chapter 14 Customer-Identity Regulations and Their Effects on Banking Transactions in Bankruptcy

Money transfers of all kinds, especially through banks, are highly regulated, and these regulations have a significant impact on a bank's interactions with its customers. When considering any transaction involving the transfer of monies in bankruptcy (which includes loans, asset sales and potentially even distressed-note sales), it is best to determine well in advance what regulations may apply so that the necessary bank processes can be completed in time. In order to comply with the regulations, a bank will frequently require additional information about the entities, individuals and funds involved in the transaction. To those who are not familiar with the regulations, these requests may seem intrusive. However, in the regulatory landscape in which financial institutions operate, compliance is necessary; resisting or refusing to provide information will at best delay and can potentially derail a transaction.

This section will explain common acronyms and describe certain Federal regulations that may be implicated in banking/money transfers in bankruptcy.¹³⁹

A. Know Your Customer (KYC)

Know Your Customer regulations arose as part of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept Terrorism Act of 2001, a.k.a. the USA Patriot Act, which was passed after 9/11 in an effort to deter terrorist behavior. There are two components to KYC: the Customer Identification Program (CIP) and Customer Due Diligence (CDD).

In order to comply with CIP, a bank will require identifying information prior to completing a transaction. The information required and the circumstances invoking the KYC process vary from institution to institution, as each bank conducts its own processes. Information may be required from an existing customer, including the names and addresses of the direct customer, its parent companies, and all individual business principals and owners (usually those holding an ownership stake of 25 percent or more), plus identifying information such as driver's licenses, passports, articles of incorporation, partnership agreements, trust documents and financial statements. Banks may also require the same information from persons or entities about to transact business with a customer. Information about a purchaser and source of funds is often required when funds will be used to repay a bank loan. The information requested may seem...