As all financial institutions are aware, in May of 2018, the Financial Crimes Enforcement Network (FinCEN) customer due diligence (CDD) Rule went into effect, amending pre-existing Bank Secrecy Act (BSA) regulations. This rule was enacted in part to help solidify customer due diligence requirements for U.S. financial institutions, and added the Beneficial Ownership Rule. Subject to certain exclusions, the rule requires that all covered Financial Institutions (FIs) collect and maintain information on beneficial owners for each new account opened by a legal entity after May 11, 2018.
While intended to improve financial transparency and prevent criminals from disguising their illicit activities, the Beneficial Ownership Rule has left some FIs struggling to understand the new rule and stay compliant. Let’s start with some of the key questions FIs may have about the new beneficial ownership rule.
What is Beneficial Ownership?
Beneficial ownership refers to the person(s) with ultimate control over funds in the account, whether through ownership or other means.
The rule designates “ownership” and “control” as being two different types of beneficial ownership. “Control” in this sense is distinguished from mere signatory authority or legal title, as being “significant responsibility to control, manage, or direct a legal entity”. With exception to certain legal entities excluded from the rule all legal entities are required to identify one “control” person, for whom FIs must collect Customer Identification Program (CIP) type information before a new account may be opened.
All covered entities must also identify any individual(s) who owns 25 percent or more of the entity and again provide CIP type information prior to account opening. This percentage allows the possibility of up to four “ownership” individuals and one control individual for each new covered entity customer. If no individual owns 25% or more of the legal entity then only the control person must be identified. While there is no requirement for a FI to collect and maintain percentage of ownership, it is a best practice and may assist with the due diligence and risk rating of new customers.
The rule does not require FIs to validate the ownership percentages of the individuals however it does require the FIs have a reasonable belief that they are who they say they are and should apply similar methods to those used for individuals under CIP.
Why is Beneficial Ownership important?
The ability to conceal beneficial ownership is attractive to criminals and detrimental to law enforcement. Prior to the new rules, the lack of beneficial ownership requirements allowed criminals a better chance at anonymity, enabling them to raise, move, store, and access illicit funds. The information collected under the Beneficial Ownership rule won’t just help FIs assess risks when opening new accounts; it will also support law enforcement investigations into tax noncompliance and other targeted BSA regulations.
What about Customer Due Diligence?
The new rule explicitly requires FIs to implement and maintain appropriate risk-based procedures for conducting ongoing customer due diligence. Covered FIs must implement “Appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profiles; and
(ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.”
What are the requirements for FIs?
The new rule requires covered FIs to:
- Enhance their due diligence practices when opening new accounts for legal-entity customers by obtaining information identifying the beneficial owners of those customers.
- Amend their AML program requirements for collecting, monitoring, and maintaining the information.
- Establish and maintain written procedures that are designed to identify and verify beneficial owners and include the procedures in its AML compliance program.
The beneficial owners identified for each legal entity customer must include:
- Ownership: each individual (if any) who directly or indirectly owns 25 percent or more of the equity interests of a legal entity customer. Depending on the facts, up to four individuals may need to be identified.
- Control: at least one individual with “significant responsibility to control, manage, or direct a legal entity customer”.
Who must comply with the new rule?
All covered FIs must comply, including:
- federally insured credit unions
- savings associations
- corporations organized for international or foreign banking or financial operations
- trust banks or trust companies that are federally regulated and subject to an AML program requirement
- mutual funds
- brokers or dealers in securities
- futures commission merchants
- introducing brokers in commodities
How does it work?
When identifying and verifying beneficial ownership, FIs can use information supplied by the customer, as long as they have “no knowledge of facts that would reasonably call into question the reliability of the information.” FinCEN provides a standard certification form that FIs can use if they choose to. It includes spaces to collect the name, date of birth, address, and social security number (or, for foreign individuals, passport number) of each applicable beneficial owner. The form or its equivalent should be completed by the customer when a new account is opened. Subsequent accounts require either another completed form or a verification from the customer that nothing has changed since the previous form was completed.
At the minimum, FIs are required to run the beneficial owner names through an Office of Foreign Assets Control screening; however, based on the risk of the customer it may be prudent to perform further due diligence on them as well. Further, if an FI detects new information about the customer in the course of its normal monitoring (such as a change in beneficial ownership information) it must update the customer’s information.
Who takes responsibility?
FIs should decide how to collect, verify, and maintain the required beneficial ownership information moving forward. They may choose to use FinCEN’s standard certification form for recordkeeping or create modified forms of their own (which may involve merely updating an existing Customer Identification Program documentation). Further, FIs should consider amending customer documents to include guidelines for legal entity customer compliance under the new rule.
Some beneficial owners may be wary of providing the required personal information. FIs can encourage transparency by providing clear-cut information about the requirements and underlying purpose of the rule to help ensure the cooperation of legal entity customer owners and control persons.
In closing, the Beneficial Ownership Rule set in place last year is viewed as an amendment that will help propel the U.S. AML/BSA industry standard forward when it comes to attacking an otherwise, global problem. Lack of a global standard for beneficial ownership presents a significant vulnerability to the global financial system. In short, the new rule and additional guidance documentation is designed to help overcome this challenge. We understand that this article briefly covers some of the higher level questions and scenarios surrounding the Beneficial Ownership requirement, but we would encourage you to contact us with any further questions regarding this issue, or others related to the AML/BSA industry.