Author: Kathleen A. Scott
In May 2016, the Financial Crimes Enforcement Network (FinCEN), the U.S. agency tasked with issuing anti-money laundering (AML) regulations, issued final regulations requiring that certain categories of financial institutions identify the beneficial owners of their legal entity customers. The regulations were effective July 2016, but only applicable to accounts opened on or after May 11, 2018.
The regulations are limited to certain categories of financial institutions (“covered financial institutions”): banking organizations, securities broker-dealers, mutual funds, futures commission merchants and introducing brokers in commodities.
These covered financial institutions are required to maintain a written risk-based customer identification program (“CIP”) that, at a minimum, includes obtaining, verifying and retaining certain information regarding each new customer, whether the customer is a natural person or an entity. Persons exempt from the CIP procedures include governmental agencies and regulated financial institutions. The final regulations expand the CIP to now include identification of beneficial owners of certain legal entity customers.
In addition to the new beneficial owner requirement, FinCEN is requiring that these covered financial institutions incorporate into their required AML compliance programs “appropriate risk-based procedures for conducting ongoing customer due diligence” that must include at least (i) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile and (ii) conducting ongoing monitoring to identify and report suspicious transactions, and on a risk basis, maintaining and updating customer information.
What does the regulation require?
Subject to certain exemptions, the covered financial institution must “establish and maintain written procedures that are reasonably designed to identify and verify” the beneficial owner(s) of each legal entity customer at the time a new account is opened, and obtain an executed form from the individual opening the account certifying to such beneficial ownership information. The information may be obtained through other means so long as the individual certifies, to the best of his or her knowledge, that the information is accurate. The covered financial institutions need to incorporate these written procedures into their AML compliance programs.
What is a “beneficial owner”?
A “beneficial owner” is defined as:
- Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer (“ownership” prong”); and
- An executive officer or senior manager of the legal entity (Chief Executive Officer, Chief Financial Officer, President, Vice President, or Treasurer); or any other individual who regularly performs similar functions (“control” prong).
All individuals who meet the “ownership” prong of the definition would be subject to the new identification and verification requirements. Under the “control” prong of the definition, only one individual must be identified and verified. A covered financial institution may identify additional individuals as part of its customer due diligence if it deems it appropriate on the basis of risk.
What is a “legal entity customer”?
The legal entities subject to the regulations are corporations, limited liability companies, or other entities created by the filing of a public document with a state secretary of state or similar office, general partnerships, and any similar entities formed under the laws of a non-U.S. jurisdiction that open an account.
In addition to those persons already exempt from the definition of “customer” under the CIP regulations, such as regulated financial institutions, several additional categories of persons also would be exempt from the definition of a “legal entity customer,” such as public accounting firms and non-U.S. financial institutions established in jurisdictions where their regulators maintain beneficial ownership information regarding such financial institutions.
Certain types of legal entity customers that are pooled investment vehicles or nonprofit corporations need only provide information for the “control” prong of the beneficial owner requirement.
Are there any exemptions?
There are limited exemptions to the requirements, such as a legal entity customer that opens an account to finance the purchase of postage or insurance premiums, provided that such accounts cannot be used to make or receive payments from third parties.
Can one financial institution rely on another financial institution’s compliance with this regulation?
Yes, under conditions similar to those already in place that would allow the covered financial institution to rely on another financial institution’s CIP.
Shortly after publishing the final regulations, FinCEN issued an initial set of Frequently Asked Questions regarding the beneficial ownership requirements.
On April 3, 2018, FinCEN issued another set of Frequently Asked Questions providing more detailed guidance. Subjects include what to do in instances where legal entity customers have complex ownership structures, when to update beneficial ownership information already on file and clarifying the various exemptions from the rule for certain legal entity customers.
FinCEN also added a cautionary note to this guidance that if a covered financial institution has notice or a reasonable suspicion that a customer is evading or attempting to evade the beneficial ownership rule or other customer due diligence requirements, it should consider whether it should (i) not open an account, (ii) close an account or (iii) file a suspicious activity report.