On August 4, 2014, the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Department of Treasury, issued a Notice of Proposed Rulemaking (“NPRM”) proposing new rules intended to clarify and strengthen customer due diligence requirements for certain covered financial institutions, including mutual funds, banks, and broker-dealers. The NPRM focuses on four key elements of customer due diligence that FinCEN views as fundamental to an effective AML program: (i) identifying and verifying the identity of customers; (ii) identifying and verifying the identity of beneficial owners of legal entity customers; (iii) understanding the nature and purpose of customer relationships; and (iv) conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.
The first proposed rule change generally would require covered financial institutions to “look through” legal entities to identify and verify the underlying natural person beneficial owners. “Beneficial owner” is defined to include both any individual who owns 25% or more of the equity interests in a legal entity and any individual with significant responsibility to control, manage, or direct the legal entity. The look-through requirement applies for any “legal entity customer,” which is broadly defined to include most U.S. or foreign corporations, limited liability companies, partnerships or similar business entities, although it exempts several entities, including certain federally registered financial institutions. In the NPRM, FinCEN clarifies that it does not expect covered financial institutions or their customers to undergo a complex or exhaustive analysis to determine beneficial ownership and expects them to be able to rely generally on representations regarding the status of individuals made at the time a new account is opened. However, the NPRM requires covered financial institutions to implement procedures to verify the identity of each beneficial owner and to respond to circumstances in which it cannot form a reasonable basis that it knows the true identity of a beneficial owner, which FinCEN expects institutions to accomplish by leveraging their existing customer identification policies. The NPRM also incorporates proposed rules that would codify requirements for covered financial institutions to identify and report suspicious activity based on development of a customer risk profile.
FinCEN has proposed an effective date for the new rules of one year from the date of the final rule. This delay is intended to allow sufficient time for covered financial institutions to modify existing customer onboarding processes to incorporate the new beneficial ownership requirement in a cost-effective manner. Comments on the NPRM must be submitted on or before October 3, 2014.