On Wednesday, May 11, 2016, the U.S. Treasury's (Treasury) Financial Crimes Enforcement Network (FinCEN) published its long-awaited rule requiring financial institutions (FIs) to obtain from their "legal entity" customers the identity of (1) 25% or greater beneficial owners and (2) a single individual with significant control over the entity, taken together to mean "beneficial owner." The rule has been in process for years, but its publication is concurrent with the release of the "Panama Papers." The rule brings the United States more in line with existing beneficial ownership standards in the European Union and formalizes an enhanced customer due diligence (CDD) standard in the United States. The new rule applies to FIs subject to Customer Identification Procedures (CIP) (banks, brokers, or dealers in securities, mutual funds, futures commission merchants, and introducing brokers), and compliance is required by May 11, 2018.

Beneficial Ownership Rule

The rule requires that each time a new account is opened by a "legal entity customer"—even for an existing customer—the FI must obtain current beneficial owner information. The information must be certified to be "accurate to the best of his or her knowledge" by an individual authorized by the customer to open accounts.

"Legal entity" is defined to mean a corporation, limited liability company, or other entity "created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account." FinCEN lists numerous exemptions, including FI customers regulated by federal functional or state bank regulators, a number of entities that must register with the SEC, state-regulated insurance companies, etc. The full list is at 31 CFR §1010.230(e)(2).

FIs may rely on a company's word that it has disclosed its beneficial owners (absent reason to believe otherwise). Therefore, no notarization or board approval is required for certification. However, when a new account is opened, the FI must verify the identity of any individual who is a beneficial owner by confirming the individual's existence (using normal CIP processes) rather than his or her status as a beneficial owner.

FinCEN provides a Certification Form as an example for collecting beneficial ownership information, but FIs are not required to use it. The same information may be collected (and retained for 5 years) in other ways. In addition, FinCEN recognizes that equity interests and the management team of a company can change over time. FinCEN is not requiring FIs to monitor these facts, but FIs are expected to update the information when the institution learns, through normal, risk-based monitoring, of ownership or management changes.

Inasmuch as beneficial ownership information is outside the scope of USA PATRIOT Act Section 314(a), FIs will need to search their records only for account or transactions matching a named subject, not the additional beneficial ownership information.

Core Elements of an AML Program

While the new regulations are referred to, colloquially, as the "beneficial ownership rules," FinCEN repeatedly emphasized that the rules are an important part of the "four core elements of customer due diligence," as explained in the "supplementary information" to the new regulations:

  1. Customer identification and verification,
  2. Beneficial ownership identification and verification,
  3. Understanding the nature and purpose of customer relationships to develop a customer risk profile, and
  4. Ongoing monitoring for reporting suspicious transactions and, on a risk basis, maintaining and updating customer information.

The second "core element" is clearly new, but FinCEN points out that the first has always been required, and the third and fourth, despite some comments during the rulemaking to the contrary, were already implicitly required in order to comply with suspicious activity reporting requirements. The last clause of the fourth requirement ("maintaining and updating customer information") is not meant to be a "categorical requirement" for regular updating, but rather a requirement to be met as a result of normal account monitoring.

These "core elements" will form the basis of upcoming Bank Secrecy Act examinations and should be incorporated into an FI's anti-money laundering policies, procedures, execution, and internal reviews. Examiners now have clear reason to expect more CDD of regulated entities.

Additional, Complementary Executive Actions

In conjunction with the beneficial ownership rule, Treasury also issued a separate notice of proposed rulemaking that will treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation, separate from its owner, for the purposes of the reporting, record maintenance, and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under Section 6038A of the Internal Revenue Code. The major requirement will be that these companies must obtain an employer identification number and share ownership and transaction data with the Internal Revenue Service (IRS). This change will allow the U.S. to carry out its obligations under tax treaties, tax information exchange agreements, and similar international agreements to provide other countries with relevant information. The public comment deadline for this rulemaking is August 8, 2016.

In conjunction with FinCEN's beneficial ownership rule, the Treasury and the Department of Justice (DOJ) are putting forward proposed legislation to Congress.

The Treasury proposed:

  • Beneficial ownership legislation (separate from Rep. Maloney's HR 3331) that will require U.S.-formed companies to know and disclose the identities of their owners as of the time of creation or ownership transfer.
  • The Senate pass eight tax treaties that have been awaiting final passage for many years.
  • Legislation to implement Foreign Account Tax Compliance Act (FATCA) reporting reciprocity that would require U.S. FIs to provide the same information to other jurisdictions as foreign companies report to the IRS.

The DOJ proposed:

  • Legislation to expand DOJ's authority in transnational corruption cases through, among other things, enforcement brought under foreign corruption laws, administrative subpoenas, and increased restraint periods in kleptocracy cases to give foreign governments more time to demonstrate probable cause.
  • Legislation to expand prosecutorial authority over theft or bribery involving federal funds to include a lowered threshold of covered corruption cases from those involving $5,000 to those involving $1,000 or more.

To summarize:

  1. FinCEN's "beneficial ownership" rules are effective July 11, 2016, and compliance is required by May 11, 2018. (81 Fed.Reg. 29398 (May 11, 2016))
  2. Treasury has proposed changes to IRS Section 6083A regulations, with comments due by August 8, 2016. (81 Fed. Reg. 28784 (May 10, 2016))
  3. The proposed legislation will be taken up by the appropriate congressional committees in due course.