In mid-July the Financial Industry Crime Enforcement Network of the United States Department of the Treasury issued guidance in the form of Frequently Asked Questions related to its new customer due diligence requirements to identify and verify the beneficial owners of legal entity customers, subject to certain exceptions. These new requirements, which will be effective for new customers beginning May 11, 2018, will be applicable to banks, broker-dealers, future commission merchants, introducing brokers and mutual funds (collectively, “covered firms”). Under FinCEN’s new rules, covered firms must establish and maintain written procedures reasonably designed to identify and verify the identities of beneficial owners of legal entity customers unless such customers are expressly excluded (e.g., certain US or non-US regulated financial entities). Beneficial owners include each real person who directly or indirectly has a 25 percent or more equity ownership interest in the legal entity customer, and a single individual with “significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager or any other individual who regularly performs similar functions.” Legal entity customers include corporations, limited liability companies, partnerships and other similar business entities. (Click here for background on FinCEN’s new requirements in the article, “FinCEN Finalizes Rules Requiring Banks, Broker-Dealers, FCMs, Mutual Funds and IBs to Help Verify Beneficial Owners of Certain Accounts” in the May 8, 2016 edition of Bridging the Week.)

Compliance Weeds: Under FinCEN’s new rules, a covered financial institution must conduct customer due diligence on all new customers’ accounts to:

  1. identify and verify the identity of customers;
  2. identify and verify the identity of beneficial owners of customers that are entities;
  3. understand the nature and purpose of customer relationships; and
  4. ​conduct ongoing monitoring in order to report suspicious transactions and, on a risk basis, maintain and update customer information.

FinCEN believes element (1) is already met by covered financial institutions’ customer identification program (CIP) while elements (3) and (4) are already implicitly required because of existing suspicious activity reporting requirements. It believes that only element (2) is a new requirement.

Generally, covered financial institutions must collect information regarding each of the natural person beneficial owners covered by the rule for a specific customer by:

  1. using the model form provided by FinCEN, which asks for each individual person’s name, date of birth for individuals, real address and identification number, and obligates an individual from the legal entity to certify that the information is true and correct; or
  2. taking other steps to obtain the equivalent information required by the model form with a certification from the legal entity.

A covered financial institution must verify the identity of identified beneficial owners using CIP-type procedures (e.g., receiving documentary or non-documentary evidence), although the covered financial institution need not receive original documents (copies are permissible). However, a covered financial institution is not required to independently verify the fact that an individual is a beneficial owner provided it has no knowledge that would “reasonably call into question” the reliability of provided information.

(Katten Muchin Rosenman LLP has prepared a CLE-eligible webinar with a PowerPoint presentation related to FinCEN’s new requirements. Click here to access.)