On February 29, 2012, the Financial Crimes Enforcement Network (“FinCEN”) issued an advanced notice of proposed rulemaking (the “Advance Notice”) in which it sought comment on a proposal to expressly require that financial institutions conduct customer due diligence (“CDD”), including by collecting beneficial ownership information for all customers, with limited exceptions. Covered financial institutions would at this time include banks, brokers or dealers in securities, mutual funds, futures commission merchants and introducing brokers in commodities. FinCEN stated that while the basis for a CDD obligation is “implicit” in existing anti-money laundering and suspicious activity reporting requirements, it seeks to expressly require CDD programs in order to achieve uniformity and consistency in the way that financial institutions address their CDD obligations and collect beneficial ownership information. It believes CDD to be important in assisting criminal investigations, in facilitating tax reporting, investigations and compliance, and in promoting financial transparency and protecting the financial system from abuse in a manner consistent with international standards.
Elements of CDD Program
FinCEN stated that an effective CDD program provides a financial institution with sufficient information to develop a customer risk profile that can then be used by such financial institution to identify higher-risk customers and accounts, and contains the following four elements:
(1) Conducting initial due diligence on customers, which includes identifying the customer, and verifying that customer’s identity as appropriate on a risk basis, at the time of account opening;
(2) Understanding the purpose and intended nature of the account, and expected activity associated with the account for the purpose of assessing risk and identifying and reporting suspicious activity;
(3) Except as otherwise provided, identifying the beneficial owner(s) of all customers, and verifying the beneficial owner(s)’ identity pursuant to a risk-based approach; and
(4) Conducting ongoing monitoring of the customer relationship and conducting additional CDD as appropriate, based on such monitoring and scrutiny, for the purposes of identifying and reporting suspicious activity.
FinCEN stated that the customer identification and risk-based verification requirement would be satisfied by a financial institution’s existing customer identification program (“CIP”). It further stated that while certain customers (namely, existing customers, provided that the financial institution has a reasonable belief that it knows the customer’s true identity; banks regulated by a federal or state regulator; governmental entities; and publicly traded companies) are exempt from CIP requirements, the CDD requirements to understand the purpose and intended nature of the accounts and to conduct ongoing monitoring would apply to such customers.
The Beneficial Ownership Element
FinCEN noted that there are currently two limited situations (regarding private banking accounts and correspondent accounts) in which financial institutions are expressly required to obtain beneficial ownership information, and that it is considering expanding the explicit requirement to obtain beneficial ownership information to all customers.
Proposed Definition of “Beneficial Owner”
Except with regard to the limited situations described in the preceding paragraph, FinCEN is considering the following two-part definition of “beneficial owner” that, in the case of legal entities, would include:
(a) each of the individual(s) who, directly or indirectly, through any contract, arrangement, understanding, relationship, intermediary, tiered entity, or otherwise, owns more than 25 percent of the equity interests in the entity; or
(b) if there is no individual who satisfies (a), then the individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, intermediary, tiered entity, or otherwise, has at least as great an equity interest in the entity as any other individual, and
(2) the individual with greater responsibility than any other individual for managing or directing the regular affairs of the entity.
Verification of the Beneficial Owner
FinCEN noted that it is considering two possible meanings of “verification of the beneficial owner.” In the first variation, verification would mean verifying the existence of the beneficial owner, as identified by the individual opening the account on behalf of the legal entity customer. In the second variation, verification would mean requiring that the financial institution verify that the individual identified by the customer as the beneficial owner is indeed the beneficial owner.
FinCEN to Issue Additional Guidance; Existing Requirements Not Superseded
FinCEN anticipates that it would provide additional guidance regarding customers that may be considered low risk (and therefore exempt for purposes of this beneficial ownership requirement), as well as identifying types of customers that may simply necessitate identification of the beneficial owner, and those that are of heightened risk requiring both identification and verification of the beneficial owner. Similar to the CIP requirement, FinCEN also anticipates that it would provide guidance to financial institutions on what they should do in the event they are unable to identify or verify a beneficial owner.
FinCEN emphasized that the proposed explicit requirement to obtain beneficial ownership information, and the proposed definition are not meant to replace existing explicit or implicit requirements under the Bank Secrecy Act.
Comments Sought Regarding the Beneficial Ownership Element
FinCEN seeks comments on several aspects of the beneficial ownership requirement including, but not limited to, comments regarding a potential exemption from the beneficial ownership requirement for legal entity customers that are exempt under the CIP rules as well as how to apply the beneficial ownership requirement to existing customers.
Issues for Additional Comment
In addition to the above-sought comments, FinCEN seeks comments on the following issues:
(1) Aside from policies and procedures with respect to beneficial ownership, the changes that would be required in a financial institution’s CDD processes as a result of the adoption by FinCEN of an express CDD rule as described in the Advance Notice;
(2) The changes that the above-described beneficial ownership requirement would impose, the proposed definition of “beneficial owner,” and considerations related to the beneficial ownership of assets in an account held by an intermediary;
(3) The circumstances under which a financial institution currently obtains beneficial ownership information on a customer or accountholder;
(4) How financial institutions currently obtain beneficial ownership information;
(5) Whether the current, primarily risk-based, approach to a CDD program requirement results in varied approaches across industries or varied approaches within industries;
(6) If there are other elements of CDD that would be more effective in facilitating compliance with anti-money laundering program requirements and other obligations under FinCEN’s regulations;
(7) The information that should be required in order to identify, and verify on a risk basis, the identity of the beneficial owner;
(8) Whether there are products and services, or customers that should be exempted from the requirement to obtain beneficial ownership information due to there being: (a) substantially less risk of money laundering or terrorist financing associated with the account; (b) limited value associated with the beneficial ownership information in mitigating money laundering/terrorist financing risk; or (c) an inability to obtain the required information due to other legal requirements;
(9) Financial institutions that should not be covered by a CDD rule based on the products and services offered; and
(10) The impact of a CDD program on consumers or other customers.
Comments must be received by May 4, 2012.