Compliance Blog

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Good morning to all of you out there in regulatory compliance land. On Friday, May 6, the Financial Crimes Enforcement Network (FinCEN) released final rules under the Bank Secrecy Act imposing explicit customer due diligence requirements on "covered financial institutions" and requiring institutions to identify and verify the identity of "beneficial owners" of "legal entity customers." Covered financial institutions, including credit unions, must comply with these rules by May 11, 2018.

FinCEN has been working on these rules for some time. In 2012, FinCEN issued an advance notice of proposed rulemaking (ANPR) and held a roundtable seeking input from external stakeholders. It then issued a proposed rule in August 2014 which, among other things, would have required financial institutions to verify the identity of the natural persons who are beneficial owners of their legal entity customers, with some exceptions. The proposal would have required financial institutions to document beneficial ownership on a standard form issued by FinCEN. For additional background on the proposal, check out our previous blog post.

Since the customer due diligence rule generally codifies existing guidance from FinCEN and the federal prudential regulators, this blog covers some of the highlights regarding the beneficial ownership rule. While the rule retains many of the substantive requirements found in the proposed rule, the preamble contains many important clarifications and the final rule adopts some significant amendments. Before diving into the rule, the following definitions may be helpful:

Covered Financial Institution - FinCEN defines a "covered financial institution" consistently with how that term is defined in its special rules for correspondent accounts and private banking accounts to include insured banks and credit unions. See, 31 C.F.R.§ 1010.605(e)(1)(i) and (iv).

Beneficial Owner - A "beneficial owner" is either an individual who directly or indirectly owns 25 percent or more of the equity interests of a legal entity customer or a single individual with significant management responsibility such as a Chief Executive Officer or President. See, FinCEN Preamble, p. 207-8.

Legal Entity Customer - "a corporation, limited liability company, or other entity that is created by the filing of a public document with the Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account." See, FinCEN Preamble, p. 209. The definition contains certain exceptions for financial institutions and public companies.

First and foremost, FinCEN originally proposed to apply the requirements to identify and verify the identity of beneficial owners of legal entity customers only to new accounts. In the final rule, however, FinCEN notes that covered financial institutions should obtain beneficial ownership information for existing customers when, in the course of normal monitoring, the financial institution "detects information relevant to assessing or reevaluating the risk of such customer." See, FinCEN Preamble, p. 28. The preamble notes that such "information could include, e.g., a significant and unexplained change in customer activity. It could also include information indicating a possible change in beneficial ownership, when such change might be relevant to assessing the risk posed by the customer. In any such event, it is appropriate to update the customer information accordingly." See, FinCEN Preamble, p. 93.

The final rule also adopts a definition of "new account" that clarifies that covered financial institutions are required to identify and verify a legal entity customer's beneficial owners each time the entity opens a new account. See, FinCEN Preamble, p. 35. While FinCEN states that the purpose of the beneficial ownership rule is to provide covered financial institutions with a snapshot of the beneficial owners of a particular legal entity customer at the time of account opening, and therefore not impose obligations to periodically update beneficial ownership information, "the opening of an account is a relatively convenient and otherwise appropriate occasion to obtain current information regarding a customer's beneficial owners."

In addition, FinCEN makes some important clarifications and amendments regarding the use of standard certification forms issued by FinCEN. Unlike in the proposal, covered financial institutions are permitted but not required to use the standard certification form to collect information regarding the identity of beneficial owners of legal entity customers. Instead, covered financial institutions may "obtain the information through their standard account opening process without utilizing the Certification Form¦" provided that the institution collects the information required to be included on the form and the individual completing the form on behalf of the legal entity customer certifies to the best of his or her knowledge that the information in the form is true and correct. See, FinCEN Preamble, p. 29-31.

While FinCEN declines to impose specific account-opening procedures in the final beneficial ownership rule, it does offer some commentary in the preamble regarding the individuals that should be completing the certification form:

FinCEN understands that financial institutions generally have long-standing policies and procedures, based on sound business practices and prudential considerations, governing the documentation required to open an account for a legal entity; these typically include resolutions authorizing the entity to open an account at the institution and identifying the authorized signatories. Such resolutions are typically certified by an appropriate individual, e.g., the secretary or other officer of a corporation, a member or manager of an LLC, or partner of a partnership. It would be appropriate for the same individual to certify the identity of the beneficial owners. Such an individual would typically have at least some familiarity with the entity's owners and with individuals with responsibility to control or manage the entity, but may not have personal knowledge of individuals having an indirect ownership interest through, for example, intermediate legal entities or contractual arrangements with nominal owners, and would have to rely on others for any such information.

See, FinCEN Preamble, p. 32. Therefore, it appears that FinCEN expects the individual completing the certification form detailing the beneficial ownership of a legal entity customer will be someone with some familiarity with the customer's corporate structure such as a senior management official or the secretary of the board.

Furthermore, when verifying the identity of an individual identified as a beneficial owner, the final beneficial ownership rule will require covered financial institutions to perform verification procedures containing the "elements required for verifying the identity of customers that are individuals under paragraph (a)(2) of the applicable [customer identification program] rule." See, FinCEN Preamble, p. 40. These procedures, however, are not required to be identical. This is a departure from the proposed rule which would have required covered financial institutions to perform verification procedures identical to the institution's existing CIP procedures.

For covered financial institutions that may use documentary verification for their CIP procedures, the final beneficial ownership rule also clarifies that these institutions may use photocopies or other reproductions of documents required to be produced as part of ordinary CIP for individual customers. FinCEN cautions, however, that "given the vulnerabilities inherent in the reproduction process, covered financial institutions should conduct their own risk-based analyses of the types of photocopies or reproductions that they will accept in accordance with this section, so that such reliance is reasonable." See, FinCEN Preamble, p. 41.

These are just some of the highlights from the final beneficial ownership rule. The Regulatory Compliance Team will provide additional information either through subsequent blog posts or in our Bank Secrecy Act newsletter, the BSA Blast, as we digest this rule and consider it as part of a larger BSA framework. NAFCU's Regulatory Affairs team is preparing a Final Regulation for NAFCU members, which will be available here.