The FFIEC has updated its BSA/AML manual effective May 5, 2018, to add a section on the new legal entity due diligence requirements and to update the section of the manual on customer due diligence generally. The Fed published an SR Letter containing these updates for the legal entity beneficial ownership rule that became effective last week on May 11.

The Fed noted that the FFIEC examination procedures will be used by all federal and state examiners. This memorandum summarizes the requirements of the beneficial ownership rule and what the regulatory examinations will cover. All bank procedures should cover these items at a minimum.

Written Procedures are Required and Should Incorporate Other Regulatory Requirements

A bank must establish and maintain written procedures that are reasonably designed to identify and verify beneficial owner(s) of legal entity customers and to include such procedures in its anti-money laundering compliance program. Banks should define in their policies, procedures, and processes how beneficial ownership information will be used to meet other regulatory requirements, such as for SARs and OFAC compliance.

Subject to certain limitations, banks are not required to identify and verify the identity of the beneficial owner(s) of a legal entity customer when the customer opens certain types of accounts. The FFIEC has a list of exempted entities and explains how trusts are to be treated.

Who is the Beneficial Owner?

Beneficial ownership is determined under both a control prong and an ownership prong.

Under the control prong, the beneficial owner is a single individual with significant responsibility to control, manage or direct a legal entity customer. One beneficial owner must be identified under the control prong for each legal entity customer.

Under the ownership prong, a beneficial owner is each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer. Identification of a beneficial owner under the ownership prong is not required if no individual owns 25 percent or more of a legal entity customer.

What information can a Bank rely on for Beneficial Ownership?

Banks may rely on the information supplied by the legal entity customer regarding the identity of its beneficial owner or owners, provided that it has no knowledge of facts that would reasonably call into question the reliability of such information. If customers are avoiding the reporting a SAR may be needed.

What information must a Bank Obtain on the Beneficial Owners?

At a minimum, the bank must obtain the following identifying information for each beneficial owner of a legal entity customer: name, date of birth, address, and tax id. This can be obtained from the FFIEC Certification Form. A bank may rely on the information supplied by the individual opening the account on behalf of the legal entity customer regarding the identity of its beneficial owner(s) so long as there are no red flags that something is amiss. If a legal entity opens multiple accounts, a bank may rely on its existing records so long as the bank receives a certification that the information is still correct. A bank also has to have procedures to verify this information after an account is opened, using the usual methods for CIP, in order to have a reasonable belief that it knows the true identity of the beneficial owners, and, if it can’t, procedures on when not to open or when to close accounts or even file SARs.

Banks have to have record-keeping procedures for the beneficial ownership information and what the bank relied upon and how any discrepancies were managed.

A bank may rely on information from another regulated bank on a beneficial owner if this is reasonable and there is a contract with the other bank to certify it is following its AML program.

What are Minimum Requirements and What are Bank Examiners Required to Examine?

Whether the bank has adequate written procedures.

Whether the bank has adequate risk-based procedures for updating customer information.

A sample of new accounts opened for legal entity customers since May 11, 2018 to review for compliance with the Beneficial Ownership Rule by:

  • Following the rule in opening the accounts
  • Obtaining the identifying information for the beneficial owners
  • Verifying the information
  • Handling any cases where the information cannot be verified
  • Maintaining the required records
  • Filing SARs if needed