On August 4, 2014, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued in the Federal Register a notice of proposed rulemaking proposing certain amendments to existing Bank Secrecy Act regulations to clarify and strengthen customer due diligence (“CDD”) requirements. The proposed amendments would apply to banks, savings associations, credit unions, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities. The proposed amendments would not apply to certain financial institutions that are not currently subject to customer identification program requirements – such as money services businesses, casinos and insurance companies – but FinCEN stated that it believes extending these CDD requirements in the future may promote a more consistent, reliable, and effective anti-money laundering (“AML”) regulatory structure across the financial system.
The proposed rules contain explicit CDD requirements and include a new regulatory requirement to identify beneficial owners of legal entity customers, subject to certain exemptions. The proposed amendments clarify that the key elements of the minimum standard of CDD, which FinCEN believes is fundamental to an effective AML program, include: (i) identifying and verifying the identity of customers; (ii) identifying and verifying the identity of beneficial owners of legal entity customers (i.e., the natural persons who own or control legal entities); (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 most significant amendment is the proposed requirement to identify and verify the identity of beneficial owners of legal entity customers. The proposed amendments define “legal entity customers” to include corporations, limited liability companies, partnerships or other similar business entities (whether formed under the laws of a state or of the United States or a foreign jurisdiction), which includes all entities that are formed by a filing with the Secretary of State (or similar office), as well as general partnerships and unincorporated nonprofit associations. However, the definition does not include trusts other than those that might be created through a filing with a state (e.g., statutory business trusts).
Financial institutions will have to identify and verify (1) each individual who, directly or indirectly, owns 25% or more of the legal entity customer’s equity interests, and (2) one individual (who could also be a 25% owner) with significant responsibility to control, manage, or direct the legal entity customer. FinCEN’s expectation is that a financial institution will identify the natural person or persons who exercise control of a legal entity customer through a 25% or greater ownership interest, regardless of how many corporate parents or holding companies removed the natural person is from the legal entity customer.
The proposed amendments also require that financial institutions must obtain a certification from the individual opening the account on behalf of the legal entity customer using a standard certification form included in the proposed amendments. In addition, financial institutions must verify the identity of the individuals identified as beneficial owners on the certification form. Because the proposed amendments would require covered financial institutions to modify existing customer onboarding processes to incorporate the new beneficial ownership requirements, FinCEN stated that the effective date would be one year from the date that the final rule is issued.
All written comments are due by October 4, 2014. The following is a link to the proposed rule: http://www.gpo.gov/fdsys/pkg/FR-2014-08-04/pdf/2014-18036.pdf.