On July 30, 2014, the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) that, if finalized, will amend the Bank Secrecy Act regulations to enhance customer due diligence (CDD) requirements imposed on financial institutions (i.e. banks, brokers and dealers in securities, mutual funds, and future commission merchants and introducing brokers in commodities). In an effort to increase financial transparency and protect the financial system from illicit use, the new rule, as proposed, would require these financial institutions to verify the beneficial owner(s) of legal entity customers.
As noted in the NPRM, the key elements of customer due diligence are:
1)Â Â Â Â Identifying and verifying the identity of customers;
2)Â Â Â Â Identifying and verifying the identity of beneficial owners of legal entity customers (i.e., the natural persons who own or control legal entities);
3)Â Â Â Â Understanding the nature and purpose of customer relationships; and
4)Â Â Â Â Conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.
The first of these four key elements is addressed through the current customer identification program (CIP) requirements issued jointly by FinCEN and the regulatory agencies. To address the second of these elements, FinCEN is proposing a specific and separate rule for the collection of the beneficial ownership information of legal entity customers. In addition, FinCEN is proposing amendments to its AML program rules to specifically reference the existing AML minimum core requirements (internal policies, procedures and controls; designation of a compliance officer; ongoing employee training; and independent audit program) as well as additional reference to the third and fourth components of the CDD requirements listed above, which are consistent with existing BSA expectations and requirements as adopted by regulators.
As part of the NPRM and in order to identify beneficial owners, financial institutions would need to obtain a standard certification from the individual opening the account on behalf of the legal entity customer. The form would require the name, address, date of birth and social security number (or passport number or other similar information, in the case of foreign persons) of the beneficial owner(s). The NPRM does not require financial institutions to verify the status of the beneficial owner; rather, financial institutions may rely on information provided in the standard certification form. FinCEN does propose that financial institutions verify the identity of a beneficial owner using existing risk-based CIP practices.
The proposed definition of a beneficial owner includes an independent, two prong test.
- Each individual 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; (Must identify each individual who owns 25% or more.) Â and
- An individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer) or any other individual who regularly performs similar functions. (Must identify one individual.)
FinCEN anticipates these CDD amendments would:
- Enhance the availability of information to law enforcement and regulators to assist with financial investigation and regulatory examinations;
- Help financial institutions to mitigate risks and comply with existing legal requirements;
- Increase the ability of law enforcement, financial institutions, and the intelligence community to identify illegal activity that may impose and national security threat;
- Facilitate reporting and investigations in support of tax compliance, and advancing national commitments made to foreign counterparts in connection with the provisions commonly known as the Foreign Account Tax Compliance Act (FATCA);
- Promote consistency in implementing and enforcing CDD regulatory expectations across and within financial sectors.
This NPRM will provide an additional burden on most financial institutions; however, this burden seems to be lessened from the proposals issued in the Advance Notice of Proposed Rulemaking (ANPRM) issued in March of 2012. Two key points where the NPRM has relaxed from some of the proposals in the ANPRM are: 1) the definition of beneficial owner which provides more flexibility and clarity; and 2) the removal of the proposed requirement to verify beneficial owner status.
FinCEN’s NPRM can be accessed here. Written comments on the NPRM must be received no later than 60 days after publication in the Federal Register.
Written by: Â Robin Cooper