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
 
In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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