Financial institutions face an important deadline – May 11, 2018 is the effective date for the new customer due diligence regulations governing beneficial ownership requirements.  FinCEN provided financial institutions nearly two years to prepare for the implementation date.

FinCEN issued comprehensive guidance on the new regulations and has sought to clarify as many issues as possible.  (See HERE for Copy).  There is no question that financial institutions face a daunting task.  However, the beneficial ownership initiative is important, and the United States is definitely behind the curve on the transparency and anti-money laundering issues.

The FinCEN Guidance clarifies and confirms a number of important issues including:

Twenty-Five Percent Threshold: A financial institution can adopt a more stringent beneficial ownership threshold than twenty-five percent, and even when a company adopts a twenty-five percent threshold, there can be circumstances when a company applies its AML program requirements, a company may have to require additional beneficial ownership information for owners below the twenty-five percent threshold.

Multiple Layered Ownership: In applying the 25 percent rule, the calculation of a beneficial owners interest in a customer entity requires multiplication of indirect interests – assume individual A, owns 60 percent of company B, which in turn owns 50 percent of customer company C, then the financial institution would be required to collect beneficial ownership of individual A because the individual owns 30 percent of the customer company C.

Customer Identification Requirements: A financial institution has to satisfy its risk-based, customer identification procedures.  If a company forms a reasonable belief that it cannot verify the identity of the beneficial owner, the financial institution has to undertake additional procedures.  One important distinction under the beneficial ownership rules from the CIP rules is that copies of certain legal documents can be accepted to verify the owner’s identity.  A financial institution has to collect a residential or business street address.  PO Box addresses are not permitted to be used to verify identity.

Existing Customers:  A financial institution may reply on an existing customer’s CIP information to satisfy the beneficial owner requirements provided that the CIP information is up-to-date, accurate and the legal entity’s representative certifies in writing or orally the accuracy of the CIP information.  (If orally confirmed, the financial institution representative should document such confirmation).

Retention Requirement:  All beneficial ownership information has to be maintained for five years from the date of the account opening.  It does not matter if the information is duplicative for each account or updating the ownership information for an account.

Single Customer Opens Multiple Accounts: A single customer who opens one or more accounts (at the same time or subsequently) can rely on a single Appendix A Certification so long as the Appendix A form is accurate and up-to date, and the legal representative confirms in writing or orally the accuracy of the prior Appendix A on file.  (If orally confirmed, the financial institution representative should document such confirmation).

Product or Service Renewals:  A financial institution has to satisfy beneficial ownership requirements when renewal a product or service, such as certificates of deposits and loans.

Pre-May 11, 2018 Accounts:  Financial institutions do not have to collect beneficial ownership information for accounts opened before May 11, 2018.  However, if the financial institution learns from monitoring activities that the customer’s beneficial ownership may have changed, the company should collect beneficial ownership information.

Updating Information: Financial institutions may have to update beneficial ownership information if it learns of changes in beneficial ownership.  However, a minor change, e.g. change of address, would not necessarily require a full recertification and validation process.

Trusts and Multiple Trustees: If a trust owns 25 percent or more of a legal entity customer, the beneficial owner under the ownership prong (as opposed to the management control prong) is the trustee.  If there are multiple trustees, only one trustee has to provide beneficial ownership information, although the trust may provide information about more than one trustee.

Legal Entity Trustee:  If the legal entity customer is a trust, the trustee is the ownership beneficial owner regardless whether it is a natural person or legal entity.

Nonprofit Entities and Charities:  If validly organized under state law, a nonprofit or charitable entity does not have to submit beneficial ownership information under the ownership prong since there is now ownership of such entities.  However, they would have to provide beneficial ownership of the single individual who exercises management control of the entity.

Foreign Public Entities Traded on Foreign Exchanges:  Foreign publicly-traded entities on foreign exchanges are not excluded from the beneficial ownership regulations.