The New ‘Beneficial Ownership’ Rule: FinCEN-mandated changes take effect in May | Wolters Kluwer
  • Insights

  • The New ‘Beneficial Ownership’ Rule: FinCEN-mandated changes take effect in May

    by Valerie Baxendale, Senior Regulatory Consultant, Wolters Kluwer

    Published March 13, 2018

    (as published in Bank News magazine)

    The May 11 compliance deadline with the new Financial Crimes Enforcement Network Customer Due Diligence rule is fast approaching. This new rule adds yet another obligation for banks to know just who their actual customer is, including determining who really owns limited liability companies and other common forms of business entities.

    Current anti-money laundering (“AML”) programs include the well-established four pillars required of existing AML programs: 1. Policies and procedures; 2. Designated compliance officer; 3. Employee training; and 4. Independent testing (31 U.S.C. 5318). The existing CDD rule requires customer identification and verification, and sufficient understanding of the nature and purpose of a customer to develop an accurate risk profile. This new rule adds a fifth pillar to an AML program, requiring banks to now include beneficial owners of a legal entity as customers. (31 C.F.R. 1020.210).

    Banks are required to obtain the same identifying information under the new CCD rule for beneficial owners at account opening as currently required, including name, street address, date of birth, and Social Security Number (passport number, or similar information, for foreign persons). The required information may be obtained by using the certification form provided by the rule in Appendix A, an institution’s internal form, or any other means that complies with the substantive requirements of the rule. The name and title of the natural person opening the account must be provided, and this person must certify the information provided is correct to the best of his or her knowledge. Verification of identifying information must be completed within a reasonable time after account opening.

    The new rule applies to “covered institutions,” which are federally regulated financial institutions (e.g., banks, credit unions, mutual funds, broker-dealers). Covered institutions will be required to establish and maintain written procedures reasonably designed to identify and verify beneficial owners of legal entity customers. These include corporations, limited liability companies, general partnerships, and similar entities formed under foreign jurisdiction laws. Legal entity customers do not include sole proprietorships, unincorporated associations, or natural persons opening accounts on their own behalf. These also do not include entities subject to federal or state regulation where information about beneficial ownership is available from federal or state agencies. Excluded legal entities include public companies, federal- or state-regulated financial institutions, registered investment companies, registered investment advisors, and state-regulated insurance companies, among others.

    Beneficial owners are identified using a two-prong test. The first is the “ownership prong” which includes each individual who directly or indirectly owns 25 percent or more of the equity interests of a legal entity customer. The second is the “control prong,” which includes a single individual with significant responsibility to control, manage, or direct a legal entity customer. This control can be exerted by an executive officer or manager (e.g. CEO, CFO, COO, managing director, general partner, president, etc.) or any individual who regularly performs similar functions. Therefore, the number of reportable individuals may vary between one and five: up to four individuals under the ownership prong (using the 25 percent threshold), and only one individual must be identified to satisfy the control prong. It is possible for the same person to be identified under both prongs.

    The CDD rule requires a bank to implement and maintain risk-based AML policies and procedures.  For some customer relationships, the 25 percent beneficial ownership threshold may be appropriate. For other customer relationships, a 10 percent threshold may be more appropriate. A more stringent percentage may be considered when a lower percentage threshold for certain higher-risk customer risk profile categories is appropriate. A lower beneficial ownership percentage will accordingly increase the number of reportable beneficial owners. FinCEN’s goal is to identify the ultimate beneficial owners, and not those intended to misrepresent actual beneficial owners, such as nominees or straw men.

    This new beneficial ownership requirement can create a cultural shift for banks in the customer relationship experience with legal entity customers. Those individuals identified as beneficial owners are not generally accustomed to providing personally identifiable information merely to open a business account with their company’s bank. Account opening representatives need to be prepared for the potential of having uncomfortable conversations with individuals newly identified as beneficial owners. Banks may consider providing affected business customers a “heads up” with regard to the new requirement.

    Testing data flow with multiple customer accounts will be critical for implementation and awareness of potential account opening pain points. Capturing appropriate and accurate information on legal entity customers in your bank’s core customer information database system is crucial. Consideration must be given to how beneficial ownership information will be collected and whether this will require new account information fields and updates to systemic data feeds and database capture and tracking. These are a few operational impacts the new rule may require management’s attention.  

    In summary, implementing the beneficial ownership rule does not merely entail updating policies, procedures and training employees to the technical requirements of the rule. Also, it is critically important to consider the customer experience, operational, and technological challenges. Wolters Kluwer can help you meet the Beneficial Ownership requirements with solutions covering verification, validation, reporting and explaining the new rule to your clients through a brochure.

  • Please take a moment and tell us what you think of our content.