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12 • 2008

It’s Un-Patriot-Act-ic: California Banks Impose Burden on Corporations Seeking to Open Accounts that Conflicts With Patriot Act

One of the most important steps in forming a new corporation is opening a bank account in the corporation’s name. Before 9-11, it was relatively easy to open a bank account for a new corporation. Banks typically asked only for a filed copy of the articles of incorporation, and perhaps corporate minutes authorizing the bank to act as the corporation’s depository bank.That changed when Congress passed the USA Patriot Act in October 2001 (see, patriot-act). The Act’s intent is to facilitate the prevention, detection and prosecution of international money laundering and the financing of terrorism.

To accomplish this goal, the Patriot Act requires all banks to have a customer identification program (CIP). The purpose of the CIP is to enable the bank to form a reasonable belief that it knows each customer’s true identity.

Banks must collect certain information about each customer’s identity, and they must verify that information. For corporations, banks must collect at least the entity’s name, address and taxpayer identification number (or proof that the corporation has applied for one).

The Treasury department regulations implementing the Patriot Act state that, where a bank relies on documents to verify the identity of a corporation, those documents may include certified Articles of Incorporation or a government-issued business license. But California banks have gone much further than the regulations mandate: before allowing a corporation to open an account, they require the corporation to submit a filed copy of its Statement of Information.

A Statement of Information is a form-required in California-that identifies a corporation’s officer and directors. Every California corporation must file an SOI within 90 days of filing its original Articles of Incorporation. It only costs $25 to file an SOI, and the form can be filed online. Simple, right?

Not really.

The problem is, the banks are insisting that a corporation produce a filed SOI. Right now, it’s taking the California Secretary of State’s office six weeks or more to return a filed SOI. In the meantime, the corporation can’t open a bank account, a situation that doesn’t really facilitate the process of getting a business up and running.

What should be particularly infuriating for managers of California corporations is that the SOI requirement violates both the language and the spirit of the Patriot Act and its implementing regulations. The CIP regulation requires that each CIP contain procedures for verifying a customer’s identity “within a reasonable time after the account is open.” And, as mentioned above, a corporation that doesn’t have a taxpayer identification number can open an account upon proof that the corporation has applied for one. During the rulemaking process, the Treasury Department explained that it “recognize[d] that a new business may need access to banking services, particularly a bank account or an extension of credit, before it has received an employer identification number from the Internal Revenue Service.” And if that statement wasn’t clear enough, we have the following:

Treasury . . . considered proposing that a customer’s identity be verified before an account is opened or within a specific time period after the account is opened. However, we recognize that such a position would be unduly burdensome for both banks and customers and therefore contrary to the plain language of the statute, which states that the procedures must be both reasonable and practicable. The amount of time it will take an institution to verify identity may depend upon the type of account opened, whether the customer is physically present when the account is opened, and the type of identifying information available. In addition, although an account may be opened, it is common practice among banks to place limits on the account, such as by restricting the number of transactions or the dollar value of transactions, until a customer’s identity is verified. Therefore, the proposed regulation provides a bank with the flexibility to use a risk-based approach to determine how soon identity must be verified.

Plus, an SOI doesn’t provide a bank with any valuable information: it’s not proof of a corporation’s legal existence, and it doesn’t show that the officers and directors listed on the form have been properly authorized to hold their positions, or even to open a bank account.

So why do California banks require a filed SOI before allowing a corporation to open an account? According to our industry contacts, the theory is that someone engaged in fraud is unlikely to go to the trouble and expense of filing an inaccurate SOI. Since it’s both easy and cheap to file an SOI, however, that theory just doesn’t hold water.