Financial Crimes Enforcement Network Releases Faqs On Diligence Procedures For Beneficial Owners Of Accounts

On July 19, 2016, the U.S. Treasury's Financial Crimes Enforcement Network ("FinCEN"), issued its Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions ("FAQs").1 The FAQs provide useful guidance for financial institutions' anti-money laundering and Bank Secrecy Act compliance programs and compliance with FinCEN's customer due diligence requirements ("CDD Rules")2 published May 11, 2016, in the wake of the release of the "Panama Papers." Although financial institutions do not have to comply with the CDD Rules until May 11, 2018, customer identification programs ("CIP") and money laundering screens should be reviewed and adjusted, if necessary, to meet the CDD Rules prior to the effective date.

FinCEN exercises regulatory functions primarily under the Currency and Foreign Transactions Reporting Act of 1970, as amended by the USA PATRIOT Act of 2001 and other legislation and regulations collectively referred to as anti-money laundering/Bank Secrecy Act ("AML/BSA").3 Accordingly, FinCEN is authorized to impose AML/BSA requirements on financial institutions, such as requiring financial institutions to maintain AML/BSA compliance procedures to prevent money laundering.4

AML/BSA compliance is a high priority for financial institution regulators, and inadequate AML/BSA policies and procedures are likely to result in examination criticism, matters requiring attention ("MRAs"), enforcement actions, possible civil money penalties, and regulatory demands for additional, more effective AML/BSA compliance personnel, systems, and internal controls. Additionally, regulatory ratings may be adversely affected, including the institution's management rating. Both the Bank Holding Company Act of 1956 and the Bank Merger Act specifically require regulators to consider the effectiveness of each party in combating money laundering, including in their overseas branches, when evaluating bank acquisition proposals. Nonbanking activities and acquisitions by bank holding companies also will be adversely affected by inadequate AML/BSA programs. Targets' AML/BSA deficiencies will slow any acquisition, even where the buyer has a strong AML/BSA compliance record.

Definitions

In addition to the customer information required to be collected under the current CIP requirements,5 the CDD Rules and the FAQs contain explicit customer due diligence ("CDD") requirements for "covered financial institutions" to identify and verify the identity of "beneficial owners" of the "accounts" of "legal entity customers." ''Covered financial institutions'' generally are: (i) federally regulated banks; (ii) securities brokers or dealers; (iii) mutual funds; and (iv) futures commission merchants and introducing brokers in commodities.6 "Beneficial owners" are either of the following:

Individuals, if any, who, directly or indirectly, owns 25 percent or more of the equity interests of a legal entity customer (the "Ownership Prong"); and An individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (e.g., a chief executive officer, chief financial...

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