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Updates on FinCEN’s Beneficial Ownership Rule’s Implementation Date

The “Beneficial Ownership Rule” (also referred to as the “Rule” herein) issued by the Financial Crime Enforcement Center (“FinCEN”) takes effect on May 11, 2018. With the Rule’s May 11 implementation date upon us, and with FinCEN recently having published its new and long-awaited FAQs regarding the Rule (FAQs), we thought that the time was right for more practical tips and answers to questions surrounding the rule.

As a reminder, “beneficial ownership” is determined two-prong test pursuant to 31 C.F.R. §1010.230(b).  Each of the following prongs is intended to be an independent test:

  1. Ownership prong.  Each individual, if any, 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. 
  2. Control prong.  An individual with significant responsibility to control, manage, or direct a legal entity customer, including the following: (i) an executive officer or senior manager (e.g., a Chief Executive Officer, Managing Member, General Partner, Vice President, or Treasurer); or (ii) any other individual who regularly performs similar functions.

 

Appendix A to 31 C.F.R. §1010.230 includes a standard certification form that financial institutions may use at the time a new account is opened to obtain the beneficial owner’s information.  Financial institutions may generally rely on the certification form provided by its legal entity customer.  However, FAQ 6 provides that a covered financial institution may “rely on the information, provided that it has no knowledge of facts that would reasonably call into question the reliability of such information.”  For instance, if an entity borrower opens an account pursuant to a business loan and provides a certification with inaccurate and/or incomplete ownership information, the financial institution may not rely on the certification if it was provided with borrower organizational documents which reflect a different ownership structure during its underwriting process.  Therefore, financial institutions should check the certification form against documents and information that they have in their control to identify any inconsistencies.

The FAQs shed some light on the application of the Rule in a variety of context, which we will briefly explain in this article.  With respect to anti-money laundering (“AML”) program rules, financial institutions may need to get beneficial ownership information for thresholds lower than 25% depending on the financial institution’s risk assessment of the account.  Per FAQ 2, “[t]here may be circumstances where a financial institution may determine that collection and verification of beneficial ownership information at a lower threshold may be warranted, based on the financial institution’s own assessment of its risk relating to its customer.”

What methods will you use to verify beneficial ownership information?  In its response to FAQ 4, FinCEN reiterated that a financial institution may use documentary or non-documentary methods, or a combination of both methods for identity verification. Further, the Beneficial Ownership Rule expressly authorizes covered financial institutions to use photocopies of identity documents for documentary verification.  FinCEN also listed acceptable types of non-documentary verification, such as “contacting a beneficial owner; independently verifying the beneficial owner’s identity through the comparison of information provided by the legal entity customer (or the beneficial owner, as appropriate) with information obtained from other sources; checking references with other financial institutions; and obtaining a financial statement.”

If an existing customer is named as a beneficial owner of a new legal entity customer, must a covered financial institution still identify and verify the identity of this individual or may it rely on the CIP identification and verification it previously performed?  In response to FAQ 7, FinCEN explains that the covered financial institution may rely on the Customer Identification Program (“CIP”) steps it previously performed, “provided the existing information is up-to-date, accurate, and the legal entity customer’s representative certifies or confirms (verbally or in writing) the accuracy of the pre-existing CIP information.” If you decide to rely on pre-existing information, your records for the new account should cross-reference the relevant CIP records.  The obvious question is whether you have a way to identify that such a person is an existing customer or whether you will need to include a question regarding this on your beneficial ownership certification form.  For instance, in addition to asking for the requisite information concerning name, SSN, and address of the beneficial owner, you also could ask whether they are an existing customer.

Please note that this article only scratches the surface of the changes your institution will need to consider to implement compliant policies and procedures to incorporate the Beneficial Ownership Rule.