Alert July 17, 2012

FinCEN to Hold Public Hearings on Proposal to Require Banks and Other Financial Institutions to Establish Customer Due Diligence Programs

As previously discussed in the February 29, 2012 Financial Services Alert, the Financial Crimes Enforcement Network (“FinCEN”) issued an advance notice of proposed rulemaking (the “Advance Notice”) in which it sought comment on a proposal to expressly require that financial institutions, including initially banks, brokers or dealers in securities, mutual funds, futures commission merchants and introducing brokers in commodities conduct customer due diligence (“CDD”), including by collecting beneficial ownership information for all customers, with limited exceptions.  On July 9, 2012, FinCEN issued a notice of public hearing and request for comment (the “Notice”) in which it announced that, on July 31, 2012, it will hold the first in an intended series of public hearings to obtain detailed clarification on the following issues:

(1)  How and when financial institutions currently obtain beneficial ownership information;

(2)  Whether and how financial institutions currently verify beneficial ownership information obtained from their customers;

(3)  The costs associated with obtaining beneficial ownership information under current practices, versus the expected costs associated with obtaining beneficial ownership information as discussed in the Advance Notice;

(4)  The costs associated with verifying beneficial ownership information (to the extent done under current practices), versus the expected costs associated with verifying beneficial ownership information as discussed in the Advance Notice;

(5)  Potential definitions of “beneficial owner” alternative to the definition set forth in the Advance Notice (and why such alternatives would be preferable from a financial institution’s perspective);

(6)  How identifying beneficial owners enhances a financial institution’s ability to manage risk, as well as the circumstances and account relationships in which beneficial ownership information may not be relevant in managing risk;

(7)  As a result of commenters’ suggestions that financial institutions be required to obtain beneficial ownership information on a risk-based basis: (i) how financial institutions would expect to assess risk in determining whether to obtain beneficial ownership information; (ii) specific examples of any customer or account relationships or red flags that would be considered of higher risk or lower risk for purposes of obtaining and verifying beneficial ownership information; (iii) how financial institutions would obtain and verify and beneficial ownership information on a risk basis; and (iv) for financial institutions that already obtain beneficial ownership information on a risk basis, detailed information as to when they obtain it;

(8)  The abilities and limitations of a financial institution in mitigating risk associated with its customer's underlying clients in the context of intermediated accounts;

(9)  How financial institutions currently conduct due diligence on trust accounts, including how they assess risk and what information they obtain;

(10) The differences in obtaining beneficial ownership information from foreign legal entity customers compared to domestic legal entity customers; and

(11)  Whether and how financial institutions identify whether legal entity customers are “shell companies.”

Requests to attend the hearing or to provide oral comments, as well as written outlines of oral comments, must be received by FinCEN by July 24, 2012.  The information that must accompany such requests as well as information regarding where to send such requests is available on Pages 3 to 4 of the Notice.