FinCEN Proposes New Rule Requiring Identification Of Beneficial Owners

This summer the Financial Crimes Enforcement Network ("FinCEN") issued a notice of proposed rulemaking proposing a rule that, if adopted, would mandate that financial institutions require their legal entity customers to identify natural persons meeting certain ownership thresholds.1

INTRODUCTION

The proposed rule represents a departure from current FinCEN regulations, under which financial institutions exercise their own judgment in making risk-based assessments whether to require beneficial owner information for legal entity accounts. The proposed rule would apply to all financial institutions currently subject to customer identification program ("CIP") requirements: banks, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities ("covered financial institutions").

STEPS ALONG THE WAY TO THE PROPOSED RULE

The notice of proposed rulemaking ("NPR") follows multiagency guidance issued in 2010 regarding customer due diligence, which stated that there is heightened money laundering risk associated with legal entity accounts, but did not propose to categorically require beneficial owner identification.2

In 2012, FinCEN issued an advanced notice of proposed rulemaking (the "ANPR"), which set forth FinCEN's rationale for an express beneficial owner identification requirement, and sought comment on particular aspects of the proposed rulemaking.3 The ANPR noted in particular that though existing CIP rules may implicitly require beneficial owner identification based on risk-based assessments, in FinCEN's view there was a lack of uniformity and consistency across financial institutions in how those obligations were being carried out, and noted the importance of such information in efforts to combat terrorism and more traditional money-laundering.

EXISTING CUSTOMER DUE DILIGENCE REQUIREMENTS

Covered financial institutions are already required to have robust policies and procedures to conduct customer due diligence ("CDD") and comply with recordkeeping and reporting requirements, such as the filing of suspicious activity reports ("SARs").4

Explicit Requirements

Explicit requirements include obtaining, and in some cases verifying, customer identification information pursuant to the mandatory CIP and filing SARs. Only in limited circumstances must covered financial institutions obtain beneficial ownership information: in the contexts of private banking accounts and correspondent accounts.5 Firms that offer private banking accounts must take reasonable steps to identify the nominal and beneficial owners of such accounts.6 Those that offer correspondent accounts for certain foreign financial institutions must take reasonable steps to obtain information about the identity of persons with authority to direct transactions through an account that is payable-through, i.e., the sources and beneficial ownership of funds in the account.7

With respect to certain accounts, covered financial institutions must collect sufficient information to develop a customer risk...