Foreign individuals present in the U.S. have a legitimate need to establish accounts at financial institutions. The need for a convenient method to access funds is there, just like it is for U.S. citizens. The Internal Revenue Service (IRS) and Federal Financial Institutions Examination Council (FFIEC) both have an interest in these individuals. The IRS wants to ensure income taxes are paid on domestic assets, and the FFIEC wants to reduce the risk of financial crimes being committed on U.S. soil. Both agencies believe financial institutions are the logical choice as gatekeepers to these individuals and their domestic funds. Know your role and responsibilities in complying with requirements related to aliens—it can make the difference between a strong and weak Bank Secrecy Act/Anti-Money Laundering (BSA/AML) program.
Look at the geographic areas you serve. Is your financial institution located in an area with industries where nonresident and resident aliens may reside, such as the farming industry or meat-packing plants? If so, there are likely nonresident and resident aliens in your community who need to be banked. Seasonal migrant workers are probably not here to commit any financial crime, but are here for an opportunity to make some seasonal wages they may not have access to otherwise. Despite their intent with their accounts, the FFIEC believes it’s more difficult to verify and authenticate nonresident and resident alien account holders’ identification, source of funds and source of wealth, which may result in BSA/AML risks. As such, these relationships must be monitored more heavily than your average U.S. citizen banking customer. The IRS wants to know their residency status so it can tax income, when applicable.
The risk associated with these foreign individuals can be mitigated through identification and monitoring controls. If you’re still unsure whether you bank nonresident and resident aliens, obtaining a list of all bank customers who have filed a Form W-8 is a great place to start.
First, make sure the bank’s BSA risk assessment is accurately capturing the risk associated with your alien customers. Your processes and procedures will look drastically different if you have two nonresident alien customers versus if you have 100. The bank’s Customer Identification Program should address these foreign individuals and the requirements for identification and verification. One key aspect of the life cycle in this customer relationship is at account opening. This is the time to perform as much due diligence on alien customers as you can by observing what identification they have, whether they have a Taxpayer Identification Number (TIN) or an Individual TIN (ITIN), what their expected account activity looks like, etc. These customers also may be requesting W-8 status at this time, which is an exemption from tax withholding from interest income. This also assists the bank with understanding the customer’s foreign and tax-exempt status. Forms W-8BEN and W-8BEN-E have specific instructions on when they should be completed, primarily depending on if a customer would be considered a nonresident alien or resident alien under the tax code—the substantial presence test. Deposit operations personnel should have a good understanding of when these forms can be rightfully completed and this status claimed; otherwise, the bank can inadvertently not report on interest that should be reported to the IRS. Form W-8 is then retained by the bank as proof of nonreporting of this income.
Once resident status has been ascertained at account opening, these customers should be placed in a separate bucket of “high-risk” customers. This high-risk classification is slightly different than other high-risk customers; these customers are being deemed high-risk simply because of their citizenship status, and not necessarily due to their expected account activity like other high-risk customers. Some factors to consider when risk-rating these customers are:
- Home country
- Types of products and services used
- What forms of identification they provided
- What sources of funds they have
- Unusual account activity
After account opening and proper risk classification, nonresident aliens should be monitored in accordance with how they’ve been risk-rated. A nonresident alien who’s opened an account for access to wages earned in the U.S. while present here, and expects no foreign activity, would be monitored differently than a nonresident alien who has opened multiple accounts and expects frequent foreign activity, including international wire transfers.
Knowing your customer population and properly assessing the risk associated with foreign individuals is the first step in mitigating risk when banking these customers. Educating retail and deposit operations personnel can help bolster the identification and verification process at account opening. Proper identification and verification at account opening helps the bank’s BSA department appropriately risk-rate and further monitor these customers. Knowing your customer is key.