You don’t need a weatherman to know which way the wind blows. – Bob Dylan, Subterranean Homesick Blues
Political winds are important for a number of reasons. When working in the government, you have to seize the political opportunities to advance practical proposals.
When it comes to requiring banks and financial institutions to collect beneficial ownership information from account holders and customers, the Panama Papers scandal has provided political cover for FinCEN to act and overcome industry resistance to the proposed regulations.
In the weeks following the Panama Papers reports and the breadth of the offshore scandal, FinCEN started to push through its long pending proposed regulations. As reported in the press, the proposed regulations are at the last stop – Office of Management and Budget’s review and approval process. With any luck and as more of the Panama Papers scandal becomes known, FinCEN should be able to issue the new regulations in short order.
The proposed regulations were first announced on August 4, 2014. The purpose of the regulations was to strengthen customer due diligence requirements under the Bank Secrecy Act for banks, brokers, or dealers in securities, mutual funds and other entities covered by the broad definition of “financial institutions” under Title 31 of the US Code.
Customer due diligence (“CDD”) consists of four elements: (1) identifying and verifying the identity of customers; (2) identifying and verifying the identity of beneficial owners of legal entity customers; (3) understanding the nature and purpose of customer relationships; and (4) conducting ongoing monitoring to maintain and update customer information to identify and report suspicious transactions. To satisfy the first element, banks and financial institutions have established customer identification programs. The proposed regulations are focused on the second element of CDD – identifying and verifying the beneficial owners of a legal entity.
FinCEN has proposed a two-pronged definition of “beneficial owner.” Under the first prong, the ownership prong, each individual who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer would be considered a beneficial owner. Under the second prong, the control prong, each individual who exercises control, manages, or directs a legal entity customer also would be a beneficial owner.
Under the first prog, a maximum of four people may be identified. Under the second prong, the control prong, covered financial institutions will be required to identify one individual.
When a customer opens a new account, banks and financial institutions will have to obtain a certification from the individual opening the account on behalf of the legal entity. The certification form would require the individual to: identify and provide basic information for any beneficial owners of the legal entity; and (2) certify the accuracy of the information provided.
Under the proposed rules, banks and financial institutions could rely on the representations of this individual for purposes of complying with the beneficial ownership requirement. FinCEN has made clear that the proposed rules would require covered financial institutions to verify the identity of any individual named as beneficial owner (by collecting a driver’s license, passport, or similar document), but not the individual’s status as beneficial owner.
There is one important exemption to this new requirement – FinCEN proposed excluding entities for which beneficial ownership information is generally available from other credible sources. Some examples of these entities include investment companies registered with the SEC; investment advisors registered with the SEC; certain publicly listed US companies; and certain issuers registered with the SEC.
Banks and financial institutions will have a one year period to implement the new rules, and will be required to update customer risk profiles with the new information.