United States: FinCEN Releases Long-Awaited Proposal on Customer Due Diligence (CCD) and Beneficial Ownership

The Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) yesterday issued proposed regulations that would formalize certain financial institutions' Customer Due Diligence (CDD) requirements and expand the degree to which those institutions must look beyond the nominal account holder to identify the natural persons who own or control certain legal entity customers.
 
Yesterday's long-awaited Notice of Proposed Rulemaking (NPRM) would include a beneficial ownership requirement as one of four key elements of CDD, but the proposed requirement may be more narrow than many feared and appears to be less burdensome to financial institutions than the earlier proposals advanced in FinCEN's February 2012 Advance Notice of Proposed Rulemaking (ANPRM). Following publication of the ANPRM, Treasury engaged in extensive, nationwide consultation with the industry. The differences between the ANPRM and yesterday's proposal suggest that FinCEN took certain industry concerns into account in its drafting process. For example, the proposed rule would not require institutions to verify that named individuals are in fact beneficial owners, and it would not require the institutions to identify an omnibus or other intermediated account's clients or those clients' beneficial owners.
 
Even so, the proposed beneficial ownership requirement would pose many challenges to covered financial institutions. The proposed rule also would amend FinCEN's anti-money laundering (AML) program rules for "covered financial institutions" (banks, securities broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities) to, in its words, "ensure alignment between existing AML requirements and minimum CDD standards." In addition, the proposed rule says it would add a fifth CDD pillar that would require covered financial institutions to understand the nature and purpose of their customer relationships and conduct ongoing monitoring.

Highlights

  • Beneficial Ownership Requirement: Covered financial institutions will be required to identify beneficial owners of new legal entity customers, subject to certain exemptions.
    • Covered financial institutions will not have to identify beneficial owners of certain types of legal entity customers.
    • Covered financial institutions will not have to identify the beneficial owners of an intermediary's underlying clients if that financial institution has no Customer Identification Program (CIP) obligation with respect to those underlying clients.
    • Covered financial institutions will be able to rely on a standard certification form.
    • Covered financial institutions will be able to rely on the CDD of other financial institutions, consistent with the approach in the existing CIP reliance structure.
  • Other AML Program Requirements: The proposed rule would add, as an AML program requirement, a new fifth pillar that would require covered financial institutions to understand the nature and purpose of their customer relationships and conduct ongoing monitoring.

Overview and Rationale

From FinCEN's perspective, an effective CDD is composed of four key elements:

  1. identifying and verifying the identity of customers;
  2. identifying and verifying the identity of beneficial owners of legal entity customers (i.e., the natural persons who own or control legal entities);
  3. understanding the nature and purpose of customer relationships; and
  4. conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

FinCEN states that the proposed rule is intended to amend its existing rules so that each of these CDD elements is explicitly referenced in a corresponding requirement within FinCEN's program rules. FinCEN asserts that the beneficial ownership requirement is the only new requirement imposed by the rulemaking, whereas the other CDD aspects of the proposed rule merely clarify existing requirements. However, the proposed rule repeatedly emphasizes that it is intended to establish minimum CDD standards for covered financial institutions, while noting that other guidance, regulations, or supervisory standards may impose additional requirements to mitigate risk.

Requirement to Identify Beneficial Owners of Legal Entity Customers

Definition of Beneficial Owner
 
FinCEN has proposed a definition of "beneficial owner" that would include two independent prongs: an ownership prong and a control prong.
 
Under the proposed beneficial ownership rule, a covered financial institution would have to identify each individual who owns 25 percent or more of the equity interests in the covered financial institution's "legal entity customer" and also one individual who exercises significant managerial control over the legal entity customer. If no individual owns 25 percent or more of the equity interests, the covered financial institution may identify a beneficial owner under the control prong only. The same individual(s) may be identified under both prongs.
 
This definition is narrower than the definition proposed in the ANPRM, which would have required financial institutions to identify the single individual "with greater responsibility than any other individual for managing or directing the regular affairs" of the legal entity. FinCEN notes, however, that identifying a natural person beneficial owner may require looking through multiple corporate entities and complex holding legal structures—i.e., piercing the corporate veil, potentially repeatedly.
 
Definition of Covered Financial Institution
 
The proposed rule would cover only those financial institutions that currently are subject to FinCEN's CIP requirement, i.e., banks, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities. However, FinCEN expressed interest in possibly extending CDD requirements in the future to other types of financial institutions, such as money services businesses, casinos, and insurance companies, in order to promote better AML regulation across the financial system.
 
Definition of Legal Entity Customer and Exemptions
 
FinCEN would require covered financial institutions to identify the natural persons who are beneficial owners of their "legal entity customers," which would include corporations, limited liability companies, and partnerships or other similar business entities (whether formed under the laws of a state or of the United States or of a foreign jurisdiction). The proposed rule would not require financial institutions to identify beneficial owners of legal entities that are exempt under the current CIP rule, nor would it require the identification of beneficial owners of certain other entities whose beneficial ownership is generally available from other credible sources. Customers exempt from the requirement would include, among others: certain charities and nonprofits; most, but not all, trusts; investment advisors; and majority-owned domestic subsidiaries of publicly traded companies.
 
Intermediated Account Relationships
 
The proposed rule states that, acknowledging industry concerns about burden and efficiency, covered financial institutions would not have to identify the beneficial owners of an intermediary's underlying clients if the financial institution has no CIP obligation with respect to those underlying clients. The proposed rule states that it is not intended to overtake the existing requirements for foreign correspondent accounts under Section 312 of the USA PATRIOT Act.
 
Verification of Identity Rather Than Status
 
FinCEN acknowledged that industry concerns requiring financial institutions to verify that an individual identified as a beneficial owner is in fact a beneficial owner would be unduly burdensome. Accordingly, FinCEN clarified that it is not proposing to require financial institutions to verify the status of a beneficial owner, only the identity of the beneficial owner. Thus, financial institutions may rely on the beneficial ownership information provided by their customers.
 
Reliance on Other Financial Institutions
 
The proposed rule would extend the CIP reliance provisions to the new beneficial ownership requirements. Under current rules, one financial institution may rely on another to conduct CIP with respect to shared customers, provided that: (1) such reliance is reasonable; (2) the other financial institution is subject to an AML program rule and is regulated by a federal functional regulator; and (3) the other financial institution enters into a contract and provides annual certifications regarding its AML program and CIP requirements.1 The proposed rule would permit such reliance for purposes of complying with the beneficial ownership requirement, if those same three conditions are met.
 
Standard Certification Form
 
The proposed rule includes a standard certification form that financial institutions would be required to use to document the beneficial ownership of their legal entity customers. The form would require the individual opening the account on behalf of the legal entity customer to certify that the information provided on the form is true and accurate to the best of his or her knowledge. Financial institutions would not necessarily be required to update or refresh information obtained through the certification, though they should do so when appropriate based on risk.
 
Amendments to Existing AML Program Requirements
 
To clarify what it characterizes as existing regulatory expectations, FinCEN proposes to amend the AML program rules for covered financial institutions to require:

[A]ppropriate 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 profile; and

(ii) Conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

FinCEN asserts that it does not intend for these amendments to necessarily require modifications to existing practices or procedures with respect to customer onboarding procedures or suspicious activity reporting. Rather, the proposed rule states that it would merely codify existing supervisory and regulatory expectations as explicit requirements to clarify the minimum standards for CDD.
 
At the same time, the proposed rule expressly states that it is "adding to these core provisions a fifth pillar" that includes CDD requirements, which would be the most significant modification to AML program requirements in over a decade.2
 
International Backdrop
 
The proposed rule is part of a broader US effort to improve compliance with the Financial Action Task Force (FATF) standards on anti-money laundering/countering the financing of terrorism (AML/CFT). In addition to establishing international standards, FATF is an international body that conducts peer reviews (Mutual Evaluations) of jurisdictions' AML/CFT legal regimes and implementation. Although generally quite positive, the 2006 Mutual Evaluation of the United States deemed US requirements only "partially compliant" with CDD standards, and sharply criticized the United States for lacking a beneficial ownership regime, slapping it with a rating of "non-compliant."3 As noted above, the four elements of CDD in the proposed rule parallel the CDD measures set forth in the FATF standard. The next Mutual Evaluation of the United States is tentatively scheduled to commence in late 2015/early 2016, and the proposed rule (and final rule if adopted) will be a key part of the review.
 
Key Differences from ANPRM
 
The proposed rule's beneficial ownership requirements are narrower than those contemplated in the ANPRM. Key differences include:

  • A narrower definition of "beneficial owner." The earlier definition could have required identification and possibly verification of the single individual "with greater responsibility than any other individual for managing or directing the regular affairs" for the legal entity. FinCEN acknowledged industry concerns that this provision would have required them to engage in a comparative analysis of all owners to determine who, in practice, had the most control. 
      
  • Exceptions for intermediated accounts. The Proposed Rule clarifies that institutions do not need to identify or verify the beneficial owners of clients of intermediated accounts and pooled investment vehicles. Thus, broker-dealers would not have to identify the ultimate beneficial owners of omnibus accounts that establish subaccounts (provided these accounts meet the elements set forth in 2003 guidance),4 and respondent banks in correspondent banking relationships would not have to identify the beneficial owners of their own clients. FinCEN cautioned, however, that institutions may still need to inquire into these intermediary relationships as part of their broader AML obligations. Notably, FinCEN stated that it is still considering whether the beneficial ownership obligations should include owners of certain pooled investment vehicles such as hedge funds.
  • Exemption of certain legal entities. Beneficial ownership obligations extend only to customers who are foreign or domestic corporations, limited liability companies, partnerships or similar business entities. FinCEN stated that beneficial ownership information is not required from entities exempt from the CIP definition of "customer" (such as banks), as well as numerous other entities whose beneficial ownership is generally available from other credible sources. Exempt entities include trusts, certain charities and nonprofits, investment advisors, and majority-owned domestic subsidiaries of publicly traded companies, among others.

Public Comments

FinCEN has invited public comments on all aspects of the NPRM, but specifically seeks comments on the following issues: the definitions of "beneficial owner" and "legal entity customer"; proposed exemptions from the beneficial ownership rule; and the treatment of existing accounts, intermediated accounts, pooled investment vehicles, and trusts. The comment period will close 60 days after the NPRM is published in the Federal Register. We expect numerous comments from various industry participants and other observers.
 

Effective Date

To give financial institutions time to modify existing customer onboarding processes to incorporate the new beneficial ownership requirement, FinCEN has proposed an effective date of one year from the date the final rule is issued. 

Footnotes

1 See 31 C.F.R. § 1020.220(a)(6).
 
2 The other pillars are: (1) a system of internal controls to ensure ongoing compliance; (2) independent testing; (3) designation of a Bank Secrecy Act compliance officer; and (4) training for appropriate personnel.
 
3 The United States was far from alone in its struggle to meet the FATF standards on CDD and beneficial ownership, which subsequently were streamlined and clarified. In the intervening years, several jurisdictions have made progress in their compliance with CDD and beneficial ownership standards, and have criticized the United States for lagging behind.
 
4 http://www.sec.gov/divisions/marketreg/qa-bdidprogram.htm

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Katrina Carroll
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions