Starting May 11, 2018, the United States Financial Crimes Enforcement Network (“FinCEN”) will require covered financial institutions (e.g., banks, broker-dealers, mutual funds and futures commission merchants) to enhance their due diligence practices with respect to new accounts opened on or after May 11, 2018 (the “FinCEN Rule”).
The FinCEN Rule requires covered financial institutions to do the following:
(1) Identify the 25% or more beneficial owners of their legal entity customers (corporations, LLCs, partnerships and similar entities) that open new accounts.
(2) Develop customer risk profiles and conduct ongoing monitoring to identify suspicious activity, and to maintain and update customer information.
Covered financial institutions will now be required to maintain written procedures as part of their AML compliance programs to identify the following natural persons for each of their legal entity customers:
1) Ownership – Each individual who directly or indirectly, through any contract, arrangement or otherwise, owns 25% or more of the equity interests of a legal entity customer; and
2) Control – Individuals with significant responsibility to control, manage, or direct a legal entity customer, including executive officers, President, Vice President and Treasurer.
Under the ownership test, up to four individuals may be identified, while under the second test, at least one individual may be identified.
The procedures adopted by the covered financial institution must allow it to identify all the beneficial owners of a legal entity customer at the time of account opening unless an exclusion or exemption applies. FinCEN has provided a form of model certification that satisfies the covered financial institution’s obligation. Covered financial institutions must also retain records of the information they obtain regarding the beneficial owners of their legal entity customers. These records must include (1) identifying information obtained; and (2) description of documents the institution reviewed to confirm identity. These records are not required to be submitted to any governmental entity – however, the financial institution must maintain a record for five years after the record is made.
Increasingly, the regulatory environment in the United States is beginning to disfavor anonymity for bank account owners. If a legal entity wishes to protect the privacy of a bank account owner, certain structuring opportunities may apply. For example, an individual’s interest can be reduced below the 25% recording threshold. Additionally, there are exceptions to the identification rule for certain types of trusts, including non-business trusts. We urge those who seek privacy to seek legal advice on how to navigate the structuring options that would best suit their needs.
DISCLAIMER: This article is not intended to provide legal advice, and no legal or business decision should be made based on its contents.