FinCEN Issues Proposed Rulemaking Aimed at Identifying Beneficial Owners of Legal Entity Customers

On August 1, 2014, the Financial Crimes Enforcement Network ("FinCEN") published a notice of proposed rulemaking ("NPRM") that, when final, would impose a new regulatory requirement on certain Covered Financial Institutions to identify beneficial owners of legal entity customers. Specifically, banks, brokers or dealers in securities, mutual funds and futures commission merchants and introducing brokers in commodities ("Covered Financial Institutions") will be required to obtain identifying information about the beneficial owners of legal entity customers.

Before finalizing the NPRM, FinCEN conducted several roundtable sessions with stakeholders around the country in an effort to gauge the need for additional identifying information for beneficial owners of legal entities and the burdens Covered Financial Institutions would suffer if such a rule were enacted. The resulting NPRM thus purports to be based on a careful analysis of the stakeholder feedback. FinCEN characterizes the proposed rule as not unduly burdensome and otherwise consistent with already-existing Customer Identification Program requirements to which Covered Financial Institutions are already subject.

The rule, which will not become effective until one year from the date that the final rule is published, will require Covered Financial Institutions to obtain a certification from the individual opening an account on behalf of the legal entity customer that identifies the beneficial owner(s) of that customer. Specifically, the legal entity must identify the beneficial owner by providing the beneficial owner's name, date of birth, address and social security number (or similar identification number for foreign entity customers). In addition, individuals opening accounts on behalf of a legal entity customer are required to certify the truth and accuracy of the information on the form. The proposed rule requires all Covered Financial Institutions to use the form made part of the NPRM to obtain the requisite identifying information and certification.

The NPRM expressly defines beneficial ownership as incorporating both an ownership and control element, and by doing so limits the applicability of the rule to only certain types of entities. Similarly, the NPRM also expressly defines a legal entity customer quite narrowly, exempting from the definition most entities that are already subject to an AML regime by a regulator such as the Federal Reserve, the IRS, the SEC or the CFTC. Finally, FinCEN has determined that these new rules will apply only to new accounts opened after the final rule is implemented.

In cases where legal entity customers are themselves owned by legal entities, FinCEN makes clear that Covered Financial Institutions must look through those other legal entities to determine which natural persons own 25% or more of the equity interests of the legal entity customers.

In the background section to the actual NPRM, FinCEN went to great lengths to both justify the need for beneficial ownership information, and characterize the new requirement as essentially co-extensive with already implemented Customer Identification Program requirements that are part of every financial institution's AML obligations. Nevertheless, even despite the relatively long implementation period and the relatively limited institutions to which these new beneficial ownership rules apply, the NPRM is a harbinger of increased scrutiny of legal entity accounts. FinCEN repeatedly emphasized throughout the NPRM the continuing AML obligations of financial institutions to maintain risk-based policies, procedures and controls for assessing the risk posed by clients, for monitoring and detecting that risk, and for detecting and reporting suspicious activity, whether or not the new beneficial ownership rules apply.

See: Press Release. See also: Cabinet AML Materials (resources are available to Cabinet subscribers only).