After four long years in the making, the Financial Crimes Enforcement Network (FinCEN) finalized the Customer Due Diligence Beneficial Ownership rule on May 11, 2016, with the mandatory compliance date set as May 11, 2018. The arduous process included an Advance Notice of Proposed Rulemaking issued in February 2012 and a Notice of Proposed Rulemaking issued in August 2014. Both provided opportunities for commentary. The release of this long-delayed rule may have been motivated in part by the recent disclosure of the “Panama Papers,” which outed a host of wealthy individuals, including celebrities and well-known public officials, who used offshore shell companies to conceal their assets. The Panama Papers brought to light that the United States has become a popular tax haven for money launderers hoping to evade taxes or hide income from other illicit activities.
Current Customer Identification Program (CIP) rules for businesses do not require financial institutions to identify the individuals behind these entities. While it was a good practice for financial institutions to obtain that information, many did not, and FinCEN determined that to be a missing link in the customer due diligence process.
Effective May 11, 2018, all federally regulated financial institutions are required to obtain CIP on beneficial owners of corporations, limited liability companies (LLCs), and general partnerships. There are many exemptions to the rule, such as entities that are currently exempt from CIP (federal, state, or local governmental entities, companies whose stock is listed on the New York Stock Exchange, American Stock Exchange, or NASDAQ, and federally or state-regulated banks). Also exempt are investment companies or advisors, securities exchanges and clearinghouses, commodities operators, advisors or dealers, insurance companies regulated by the state, and public accounting firms. The reason for those exemptions is that the beneficial ownership information is required as part of these entities’ respective state and federal licensing requirements.
In addition, certain attorney escrow and client trust accounts are exempt to preserve attorney-client privilege, and trust accounts are exempt as it was deemed to be too cumbersome to attempt to obtain beneficial ownership information on beneficiaries. It should be noted, however, that the rule states that if institutions have a practice of obtaining beneficial ownership information on trustees of the trust, the continuation of that practice is strongly encouraged. Finally, nonprofit entities are exempt although there is an expectation for financial institutions to identify the individual with significant responsibility or control of the nonprofit entity.
The determination of who should be subjected to the compliance requirements is two-pronged: ownership and control. Ownership refers to anyone who has 25% or more equity interest in an entity. Control refers to the individual who has significant responsibility in the control, management, or direction of the entity, such as the CEO, CFO, President, or Managing Partner. Although there may be up to four beneficial owners, there should only be one beneficial owner based on control.
Financial institutions must obtain personally identifying information about each beneficial owner. They may rely on copies of identifying information to satisfy this requirement. As with all CIP information, the identifying information must be documented and maintained by the institutions. The initial Notice of Proposed Rulemaking contemplated requiring the use of a standard certification form. However, while the final rule makes use of the form, it is now optional and permits institutions to obtain and record the necessary information “by any other means that satisfy” their verification and identification obligations.
FinCEN made clear that the rule does not require financial institutions to continuously update each customer's beneficial ownership information; rather, the rule states that institutions may rely on the beneficial ownership and control information at the time of account creation. FinCEN does expect institutions to update beneficial ownership information when they detect relevant information about the customer during the course of regular monitoring, as is currently required for updating due diligence information on existing customers. For purposes of monitoring, the rule states that institutions should use beneficial ownership information as they use other information they gather regarding customers, including, for example, compliance with the Office of Foreign Assets Control (OFAC) regulations and Currency Transaction Report aggregation requirements.
Existing customers are exempt from the rule, unless they open an additional business account relationship covered by the rule, in which case beneficial ownership information must be obtained.
While the mandatory compliance date of May 11, 2018, seems to be in the distant future, all covered financial institutions should ensure the following prior to the implementation date:
- Proper training is provided to front-line staff.
- The core processing system is updated to capture the beneficial ownership information if the model form is not used.
- CIP and OFAC policies are updated.
- Risk assessments are updated based on the risk level of the beneficial owners identified.
- Automated surveillance monitoring systems and cash aggregation reports are updated to capture beneficial ownership transactions.
Putting the proper controls in place will allow for a seamless transition to ensure mandatory compliance.