The Financial Crimes Enforcement Network finalized rules requiring banks, broker-dealers, future commission merchants, introducing brokers and mutual funds (collectively, “covered firms”) to identify the beneficial owners of their legal entity customers. Currently such entities are mandatorily required to know the identity of each of their legal entity customers, but not necessarily their beneficial owners.

FiNCEN also adopted rules making explicit the obligation of covered firms to understand the nature and purpose of their customer relationships in order to develop customer risk profiles, as well as to conduct ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information.

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.

A covered firm must evidence its compliance with FinCEN’s new requirements by obtaining a mandatory certification form from a legal entity customer that identifies its beneficial owners or by receiving the information required by the form (i.e., for each beneficial owner, name, date of birth, address, and social security number, or for non-US persons, passport number) by another means with an appropriate certification. A covered firm must also verify the identity of each enumerated beneficial owners according to risk-based procedures that contain the elements required for verifying the identity of individuals under FiNCEN’s existing relevant rules through documents or non-documentary methods (i.e., Customer Identification Program requirements (click here for a background on these requirements)). However, a covered firm may use photocopies or reproductions of original documents in connection with such verification.

FiNCEN’s new requirements only apply in connection with the establishment of new accounts and will not ordinarily apply retroactively. However, a covered firm may have an obligation to obtain beneficial ownership information for an older account, if concerns about the account arise during ongoing monitoring.

If an intermediary is a covered firm’s customer and the covered firm currently has no FiNCEN obligation today with respect to the underlying clients of the intermediary under CIP, the firm should treat the intermediary (not the intermediary’s underlying clients) as its legal entity customer.

Under FiNCEN’s new rules, one covered firm may delegate its responsibilities to another covered firm, but only pursuant to a written contract that includes certain enumerated obligations.

In adopting its new rules, FiNCEN expressed its belief that the new formal obligation of covered firms to understand the nature and purpose of their customer relationships and to conduct ongoing monitoring for reporting suspicious transactions are already implicit obligations of covered firms in connection with their suspicious activity reporting requirements.

As part of its new rules, FinCEN formally stated each of the elements of an acceptable anti-money laundering program for covered firms. The provisions are generally the same for each type of covered firm and include the following elements:

  • establishment and maintenance of polices, procedures and internal controls reasonably designed to prevent the firm from being used for money laundering or terrorist financing;
  • independent testing;
  • designation of an individual(s) responsible for implementing and maintaining the firm’s AML program; and
  • adoption of “appropriate” risk-based procedures for ongoing customer due diligence, knowing customers and ongoing monitoring to identify and report suspicious activities and to update customer information.

All covered firms except mutual funds are also expressly required to conduct training of appropriate persons under the new rules.

Covered firms must comply with FinCEN’s new rules beginning May 11, 2018. FinCEN is part of the US Department of Treasury. FiNCEN initially proposed adoption of the new rules in March 2012.

Simultaneously with issuance of FiNCEN's new rules, the US Department of Treasury announced its proposal for a new federal law that would require companies to report to it information regarding their beneficial ownership at the time of their creation.

Compliance Weeds: As under FiNCEN’s existing CIP rules, an account for a futures commission merchant under its new beneficial ownership rules appears to be a clearing account, not an execution account. There are no CIP obligations for execution accounts. For broker-dealers, an account appears to be both a clearing and an execution account, however. That being said, in its commentary in connection with adoption of the its final rule for FCMs, FiNCEN noted that “all account relationships, and not only those which are ‘accounts’ within the CIP rule definitions …must be monitored in some form in order to comply with existing [suspicious activity reporting] requirements.”