Executive Summary

The Financial Crimes Enforcement Network (FinCEN) issued a final rule on May 11, 2016, (effective for covered financial institutions on May 11, 2018) regarding customer due diligence requirements for covered financial institutions. As a result, a company entering into new lending, treasury management, hedging or other relationships or opening new bank accounts with covered financial institutions must now generally disclose additional information related to individuals who (i) control the company and (ii) own a certain amount (directly or indirectly) of the company. These requirements are in addition to the "know your customer" (aka KYC) deliverables mandated by the USA PATRIOT Act (the Patriot Act).

Practical takeaways about the Beneficial Ownership Rule discussed in this article include:

  • Your Financing and Any Amendments to Your Existing Credit Facility Will Likely Be Affected. Even if you already have existing bank accounts and are obtaining new financing with an institution with whom you have an established relationship, expect renewed legal entity due diligence, more questions, new forms to complete and additional KYC hurdles.
  • Communicate Upfront. Start the conversation early with bank lenders to determine how the bank's compliance department is implementing the Beneficial Ownership Rule and to learn what ownership threshold (i.e., 10 percent, 25 percent) the bank is requiring.
  • Allow Time to Complete Forms. Allocate additional time and resources to completing the administrative tasks related to the beneficial ownership forms.
  • Carefully Handle Information. Handle with care the communication of individuals' Social Security numbers and other personally identifiable information.
  • Impact on Credit Documents. If your credit agreement does not already address the Beneficial Ownership Rule, expect financial institutions to introduce provisions covering this topic upon refinancing or an amendment. While the Loan Syndication and Trading Association (LSTA) has proposed model provisions implementing the Beneficial Ownership Rule, those provisions have not been universally adopted by many financial institutions in the commercial loan space.1

General Overview

The Beneficial Ownership Rule became effective for covered financial institutions on May 11, 2018, and includes amendments to existing Bank Secrecy Act rules to require financial institutions to identify (and verify such identity of) legal entity customers' beneficial owners.2 Already in effect at the effective time of the Beneficial Ownership Rule, the Patriot Act separately requires that financial institutions collect certain customer information in order to verify the customer's identity.3 Thus, companies, often frustrated by banks' preexisting KYC inquiries, are now struggling with the more intensive Beneficial Ownership Rule and its interplay with existing KYC disclosure requirements.

Background on FinCEN: Protecting the Financial System and Fighting Kleptocrats

FinCEN, a bureau of the US Treasury Department, has the mission of protecting the United States financial system from illicit use and promoting national security through the collection and dissemination of financial intelligence. To achieve these goals, FinCEN provides law enforcement authorities with access to financial intelligence used to combat kleptocrats, terrorist financing and criminals hiding money. In particular, FinCEN is looking to smoke out "nominees" or "straw men" and identify the true beneficial owners of legal entities.4

Treasury estimates that $300 billion each year is generated in the United States from financial crimes.5 Though recognizing the burden of the Beneficial Ownership Rule on financial institutions and the economy overall, FinCEN maintains that even a 0.6 percent reduction in illicit activity would make the onerous expenses worthwhile.6

FinCEN's Beneficial Ownership Rule: The Nitty Gritty

Who Is In—and Who Is Out?

Covered Financial Institutions: (i) banks or credit unions; (ii) brokers or dealers in securities; (iii) mutual funds; (iv) futures commission merchants; and (v) introducing brokers in commodities.7

These entities, among others, are not covered financial institutions subject to the new rule: casinos and money services businesses.8

Legal Entity Customers: corporations, limited liability companies or other entities that are created by the filing of a public document with a Secretary of State or similar office, general partnerships and any similar entities formed under the laws of a foreign jurisdiction that opens an account.9

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1  Although this client alert does not focus on the impact of the Beneficial Ownership Rule on credit documents, the LSTA has published updates to its model credit agreement. See blackline of October 17, 2017 to May 4, 2018 Form Revolving Credit Agreement: https://www.lsta.org/legal-and-documentation/primary-market?download_file=45962074-ec36-11e8-bd85-bc764e0453da 

See FinCEN CDD Rule, 31 CFR §1010.230.

See Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, 107 P.L. 56, as amended.

See FIN-2016-G003 issued on July 19, 2016 by FinCEN entitled Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions.

See 80 FR 80308.

See FinCEN CDD Rule, 31 CFR §1010.230.

See 31 C.F.R. § 1010.605(e)(1).

See 31 C.F.R. § 1010.100(t) and C.F.R. § 1010.100(ff).

9   See 31 C.F.R. § 1010.230(e)(1).

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.