FinCEN Issues Customer Due Diligence Requirements

On May 11, 2016, the U.S. Treasury Department's Financial Crimes Enforcement Network ("FinCEN") issued the final rule of its "Customer Due Diligence" ("CDD") requirements under the Bank Secrecy Act.  The final rule imposes a new requirement on "covered financial institutions" ("CFI") - which include banks, broker-dealers, mutual funds, futures commission merchants and introducing brokers in commodities.  The rule requires such CFIs to identify and verify the natural persons behind the beneficial owners of certain accounts.  The final rule becomes effective July 11, 2016 and CFIs must comply with these rules by May 11, 2018. Beginning on May 11, 2018, CFIs must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted). CFIs may comply either by obtaining the required information on a standard certification form or by any other means that comply with the substantive requirements of this obligation. CFIs may also rely on the beneficial ownership information supplied by the customer, provided that it has no knowledge of facts that would reasonably call into question the reliability of the information. The identification and verification procedures for beneficial owners are very similar to those for individual customers under a standard customer identification program, except that for beneficial owners, the CFI may rely on copies of identity documents.

CFIs are not currently required to obtain the identity of individuals who own or control their legal beneficial owners, which enables individuals looking to hide ill-gotten proceeds to access the financial system anonymously.  The beneficial ownership requirement will address this weakness and provide information that will assist law enforcement with financial sanctions, improve the ability of financial institutions to assess risk, facilitate tax compliance and advance U.S. compliance with international standards and commitments.

FinCEN requires that a satisfactory Anti Money Laundering program include the following four "core elements":

  1. Customer identification and verification
  2. Beneficial ownership identification and verification (i.e., the natural person owner/controller)
  3. Understand the nature and purpose of customer relationships to develop a customer risk profile, and
  4. Ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information.

Here is a summary of the final rule:

A. Beneficial Ownership

For each new account that a legal entity customer opens, the CFI must identify its beneficial owner(s) under either of the following criteria:

  1. Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, owns 25 % or more of the equity interests of the legal entity customer; or
  2. A single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (such as 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.

Recordkeeping Requirements

The final rule also requires CFIs to create and retain certain records relating to the beneficial owner identification and verification process.  Identifying information regarding the legal entity customer, including the FinCEN certification (if obtained), must be retained for five years after the date the account is closed.

Limitations and Exemptions

FinCEN excluded 16 categories of entities from the definition of legal entity customer, including banks and financial institutions, investment advisers, exchange or clearing agencies, and other heavily-regulated entities registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission.  Also excluded are insurance companies, non-U.S. financial institutions established in a jurisdiction whose regulator maintains beneficial ownership information, and non-U.S. governmental entities engaging in non-commercial activities.

Conclusion

The U.S. government has taken several steps to promote enhanced transparency in financial transactions.  In addition to the CDD rule, the Treasury Department is proposing legislation that would require all companies formed in the U.S. to report beneficial ownership information to the Treasury Department.  The Justice Department has also submitted to Congress a legislative proposal that, if adopted, would enhance the ability of law enforcement officials to obtain information from domestic and foreign banks so they can investigate and prosecute money laundering.  Those not covered by the new rules should be on alert for the coming of enhanced beneficial owner identification requirements from their respective regulators.

Here is a link to the Customer Due Diligence Requirements for Financial Institutions - Final Rule (May 11, 2016) at:

https://www.federalregister.gov/articles/2016/05/11/2016-10567/customer-due-diligence-requirements-for-financial-institutions

Press Release

https://www.treasury.gov/press-center/press-releases/Pages/jl0451.aspx

If you have any questions regarding this Alert, please contact Dan Viola at 212.573.8038 or dviola@sglawyers.com.

Cheryl Spratt